Stock prices in the U.S. rose at the open as investors reacted to the European Central Bank’s decision to cut interest rates further and increase its year-old bond-buying program in a fresh effort to stimulate the eurozone economy and combat dangerously low inflation.
The Dow Jones industrial average was up about 60 points, or 0.4%, in early trading. The broader Standard & Poor’s 500 stock index was 0.4% higher and the tech-heavy Nasdaq composite index gained 0.6%.
Wall Street was watching to see if ECB president Mario Draghi would deliver on his recent promises to do what it takes to revive the eurozone economy. The Draghi-led ECB appears to have given investors what they hoped for. As expected, the ECB pushed interest rates even lower into “negative territory” and said it would spend more euros each month to buy bonds.
Both moves are designed to jump-start growth by giving banks more of an incentive to lend money and to get more euros into the system.
European stocks initially surged on the news but pulled back some in later trading. The broad Stoxx Europe 600 index was 0.9% higher. Germany’s DAX was 1% higher and the CAC 40 in Paris was up 1.8%. The euro weakened on the move, dipping 1.35 vs. the dollar to 1.085.
The ECB’s deposit rate, or what it charges banks to park cash with the central bank, was cut an additional 0.1% to -0.4%. Normally banks pay out interest to depositors. But in the current negative rate set-up, commercial banks actually pay the ECB for euro deposits at the central bank.
The ECB also said it would increase its purchases of bonds to 80 billion euros per month, up from 60 billion euros. The expansion of the bond-buying program means the ECB will buy more bonds from financial institutions, a move that will result in an injection of cash back to the bond sellers. The hope is institutions like banks will then use the freed-up cash to make loans.
Nigel Green, CEO of financial firm deVere Group, says the ECB’s latest round of stimulus will be a “catalyst” for investors to expand their holdings in stocks and other risk assets.
“They will be keen to top up their portfolios now because there are high-quality equities to be had at bargain prices,” Green noted in an e-mail. “Indeed, in some sectors, stocks have reached 2009 levels, although the underlying economic environment has improved. And because the ECB is willing to take bold additional steps to encourage sustainable growth in the eurozone, thereby increasing investor confidence and making those buying opportunities look even more appealing.”
“Mario delivers,” is the way Bespoke Investment Group put it in a note to clients.
The debate over stimulus is heating up in markets. While investors know some form of stimulus is necessary to turn around the eurozone’s fortunes, there is also concern that negative rates could damage the profitability of already struggling eurozone banks. Investors also caution that the benefits of ever-bigger stimulus programs are not having the positive impact they did when they were first launched years ago.
Aggressive stimulus by the ECB could also complicate the U.S. central banks decisions on interest rates. The reason: a weaker euro means a stronger dollar, and a stronger dollar acts as a depressant on U.S. companies that do a lot of business abroad. U.S. stocks have rallied the past four weeks as fears of a recession have faded and oil prices have stabilized, which have resulted in a big catch-up rally for beaten-down energy shares.
Shares closed mixed in Asia. Japan’s Nikkei 225 rose 1.3%, but Hong Kong’s Hang Seng index dipped 0.1% and the Shanghai composite in mainland China fell 2%., agencies report.