As we mentioned yesterday, the European Central Bank (ECB) held a key meeting on Thursday at which Mario Draghi outlined the banks plans to attempt to draw a line under the Euro zone crisis.
The ECB has left interest rates unchanged at 0.75% despite speculation that they may fall to 0.5% to provide stimulus to the Eurozone economy. The meat of the ECB’s policy decision is that the bank will directly act in the markets to buy sovereign bonds of highly indebted nations, if they comply with certain requirements. The idea behind this move is that it will provide support to the likes of Spain and Italy by pushing down the interest they are required to pay to attract investors to their bonds.
It is possible that the move could help restore confidence to European markets and lead to increased demand. With the interconnected nature of the global economy, this could have a knock-on effect and provide a spur to the weak global recovery.
The ECB’s move led to an immediate easing of Italy’s and Spain’s borrowing costs – purely as a result of a degree of restored market confidence – the yield on Italian 10-year bonds fell and Spain raised €3.5 billion through the sale of 2, 3 and 4 year bonds. The yield on 2-year bonds dipped from 4.715 to 2.8%; for 3-year bonds it fell from 5.09 to 3.68% and for the 4-year bonds declined from 5.97% to 4.6%.
Stock markets have also reacted well to the move with Asian markets up between 2.2 and 2.6%. In Europe, markets had less time to react to the news, but they saw gains of between 2.1 and 3%. Naturally, the Euro also benefited from the move and it closed at 99.63 Yen and $1.263 in Asian trading.
Initial signs have been encouraging, but again, only time will tell if the seeds of confidence which have been sown by the ECB will grow.