John Dance

Markets disappointed by lack of ECB bond action

At midday the Bank of England’s Monetary Policy Committee announced that it was to keep interest rates on hold at 0.5%, adding that there would be no increase to the £275 billion asset purchase program that was augmented in September. Many economists expect a further £75 billion increase in the Quantitative Easing program in February, given the headwinds facing the UK economy. It came ahead of the equivalent announcement from the European Central Bank, which delivered the widely anticipated 0.25% cut to leave interest rates at 1.0%.

The response to Mario Draghi’s subsequent ECB press conference was mixed, initially causing a bounce of around 1% as the market learnt that new three year loans were to be introduced to provide funding to struggling European banks. Collateral requirements were also reduced as was the reserve ratio (from 2% to 1%) in an attempt to improve liquidity and lending in the European banking sector, actions that were collectively more substantial than had been expected. Despite the action, pessimism immediately followed as Draghi went on to suggest that the ECB’s bond purchase program was not infinite, dashing hopes that the program may have been stepped up in a bid to help struggling countries.

Amid the macroeconomic uncertainties that were to intensify tonight with the commencement of the 8thEU summit this year, defensive stocks were in demand. FTSE 350 sectors contributing most to the indices were Tobacco, Pharmaceuticals and Communications (fixed and mobile), all considered defensive sectors due to their non-cyclical nature. On an individual stock basis, British American Tobacco was a standout performer with a 1.5% gain, with Morrison Supermarkets, BT and GlaxoSmithKline not far behind. In contrast, Lloyds and RBS were amongst the biggest losers with losses in the region of 5.5% and 7.4% respectively.

The FTSE 100 finished the day down 1.1%, a 63 point loss that saw the index close at 5484. In Europe, the DAX and CAC were down 2.0% and 2.5% respectively, whilst losses in the states we in line with our own at the time of writing.

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