ECB decision rocks markets

A surprise interest rate cut and the announcement by the European Central Bank (ECB) to begin buying financial assets pushed the euro down sharply and boosted European on Thursday.

Europe's single currency dropped to $1.2994 before climbing back to $1.3008 - still down by 1 percent for the day, and trading at its lowest since July 2013.

Jameel Ahmad, chief market analyst for FXTM, told AFP that the ECB had "shocked the market."

"This surprising move does showcase how eager the ECB is to encourage banks to lend again, and they clearly see negative deposit rates as an alternative way to improve inflation levels," he said.

A negative interest rate of minus 0.2 percent on overnight deposits means the ECB actually charges banks for parking money with it instead of lending it to businesses. The increase in the rate by 0.10 percent was just one of the measures announced by the central bank for the eurozone. In addition, the bank cut its refinancing rate for commercial banks down to 0.05 percent, and announced it would start buying asset-backed securities (ABS) and covered bonds in October to pump more money into the economy.

Jim McDonald, chief investment strategist for Northern Trust told the AP news agency that the ECB's decision was "positive for global equities" because it would increase confidence that the bank was taking action to keep economic growth advancing.

As a result, European stock markets surged massively on Thursday. The FTSEurofirst 300 closed up 1.1 percent at 1,399.43 points - its highest level since early 2008. In Paris, the CAC 40 surged 1.65 percent to 4,494.94 points, while Frankfurt's blue-chip DAX index gained 1.02 percent to 9724.26 points by the close.

Bond traders were also in a buying mood, delving into eurozone debt, thus driving, for example, France's borrowing costs to a new record low rate of 1.33 percent for its 10-year bonds.

Even though it's unclear if the ECB measures will turn out to be effective in boosting growth and inflation in the eurozone, financial markets are bound to profit from the move. Markus Huber, a senior trader with Peregrine & Black told the news agency Reuters that he was convinced share prices would continue to go up as markets were flooded with fresh liquidity, with very few alternatives to stocks.

uhe/sri (AFP, AP, Reuters)