Europe’s stock markets surged yesterday after European Central Bank chief Mario Draghi hinted at further eurozone interest rate cuts, on the eve of a key US monetary policy decision.
In midday deals, London stocks added 0.8 per cent, while Paris soared 1.5 per cent and Frankfurt leapt 1.2 per cent in value in afternoon trade.
“Super Mario is back!” said IG analyst Chris Beauchamp in summary at the markets action.
“Despite only having a few months left to his tenure, the head of the ECB has handed his successor a firmly dovish bias, as he leaves the door open to more QE [quantitative easing stimulus] and renewed negative rates at the ECB in order to try once again to kick-start the eurozone economy.”
Markets reacted strongly after ECB boss Draghi’s renewed openness to lowering interest rates still further, as well as other steps to boost the bloc’s anaemic growth and inflation.
“Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools,” Draghi told the ECB’s annual economics gathering in Sintra, Portugal.
Central bank governors had already discussed potential rate cuts at a regular meeting of the ECB’s governing council in early June, faced with an economy weighed down by trade conflicts making for sluggish price growth.
The prospect of falling interest rates tends to push share prices higher because they cut company borrowing costs and also boost consumers’ disposable incomes.
Across the pond today, the Federal Reserve is also expected to give further hints about what would be the central bank’s first rate cut in more than a decade. The Fed has raised rates nine times over the last three and a half years as the economy recovered and put millions of Americans back to work.
Investors are also gearing up for next week’s high-stakes G20 summit, where US President Donald Trump is set to meet Chinese counterpart Xi Jinping on the sidelines to discuss their trade war.
“So much has been priced in at this stage that it’s going to be tough for the [US] central bank to live up to market expectations,” Oanda analyst Craig Erlam said.
“Ultimately, how they see the year out will likely largely depend on trade talks between the US and China, with the next opportunity to overcome the impasse being the G20 next week.”
While trade war tensions continue to make waves, the key focus for now is what the Fed plans to do with monetary policy as the tariff stand-off shows signs of impacting the world’s top economy.
The latest weak data saw manufacturing activity in New York state plunge into contraction this month and hit its lowest level since late 2016, reflecting steep drop-offs in new orders, backlogs and employment.
On currency markets, the pound remains under pressure on growing worries that arch-Brexiter Boris Johnson will be elected leader of the ruling Conservatives and thus prime minister, and pull Britain out of the EU without a divorce agreement.