European Markets Decline After Rate-Cut to 1%

Devan Biswas
08 Dec, 2011
New York City

European markets traded lower and small markets fell sharply. The European Central Bank lowered its benchmark rate 25 basis points to 1% and offered longer dated loans and expanded collateral it is willing to accept but failed to increase its bond buying program.

[R]4:50 PM Frankfurt – European markets traded lower and small markets fell sharply. The European Central Bank lowered its benchmark rate 25 basis points to 1% and offered longer dated loans and expanded collateral it is willing to accept but failed to increase its bond buying program. Market indexes in the region fell between 1.5% and 3%.[/R]

European markets traded sideways after the European Central Bank cut its benchmark rate and offered to lend more money.

Mario Draghi, the newly appointed President of the ECB cut the rate for the second time in as many months. The rate was cut by 25 basis points to 1% and the central bank said it will offer longer terms loans to banks and will meet all requirements.

The move highlighted the willingness of the central bank to ease liquidity concerns in the euro zone and also alleviated the dollar funding worries for the banks. Banks were quick to access the newly created dollar lending window at a reduced after six central banks agreed to provide dollars and 34 banks in the euro zone borrowed for short term $50.5 billion on Wednesday.

Draghi also said banks will be able to borrow for three years and the central bank will accept wider variety of collateral. The move will facilitate more lending to banks in the peripheral zone as Italian and Spanish banks struggle to meet their funding requirements.

Italian banks stepped up their borrowing in the last three months as bond yields soared above 7%. The latest data from the Bank of Italy released yesterday showed that Italian banks sought the help of the European Central Bank to borrow €153.2 billion in November up from €111.3 billion in October and sharply more than €41.3 billion borrowed in June.

The central bank also revised its economic growth estimate in the euro zone and raised the prospect of a recession next year and estimated inflation in the next year between 1.5% and 2.5%, just near its preferred target of below 2%.

The ECB officials now estimate economic growth in 2012 to range between a decline of 0.4% to 1% and from the earlier estimate of an increase between 0.4% and 2.2%.

The central bank also tightened its estimate of the growth in the current year between 1.5% and 1.7% from the previous forecast of a range between 1.4% and 1.8%.

Bank of England also left its key lending rate at 0.5%, where the rate has been since March 2009 and also left its bond buying program intact at £275 billion. The central bank also highlighted economic risks if the euro zone economies dip to a recession.

European stocks traded higher but only marginally ahead of the start of the summit as the early optimism in the week turned to a caution.

In Frankfurt trading DAX Index declined 1.8% or 105.54 to 5,889.19 and in Paris CAC 40 Index dropped 1.8% or 105.54 to 5,889.19. Stock market indexes turned lower after the central bank failed to assure markets that it is ready to purchase more sovereign bonds.

Market indexes in Spain fell 1.7%, in Milan dropped 3%, in Athens declined 1.3% ad in Stockholm eased 1.7%. The market index in Switzerland declined 0.6%.

Bond yields jumped after the rate decision and the central bank did not step up and increase its bond purchase program.

Italian bond yield increased 26 basis points to 6.23% and Spanish bond yield of similar maturity increased 23 basis points to 5.66%. German bonds of two years of maturity decreased to 0.29%.

Stock Movers

French banks were in focus after Paris based Le Monde newspaper said banks may not need to raise as much capital as previously estimated.

The report said banks need to raise €7 billion compared to the estimate of €8.8 billion estimated by the European Banking Association in late October. The report was not confirmed by the three leading banks and the French banking association.

BNP Paribas declined 4.7% to €31.43, Credit Agricole fell 4% to €4.62 and Societe Generale decreased 5.9% to €18.83.

Separately, the Bank of France estimated economy in the fourth quarter is likely to stall after growing at 0.4% in the third quarter.

Automakers turned lower following the general market weakness.

Daimler AG declined 3.6% to €32.77, Volkswagen AG preference stock fell €3.20 to €123.05 and Peugeot SA dropped 6% to €12.62.

Tesco Plc increased 2.30 pence to 399.20 pence after the UK based groceries retailer said sales at its UK based stores excluding VAT and fuel declined 0.9% at the end of the quarter to November 26. Sales in the third quarter rose 7.2% and left its outlook unchanged in the current fiscal year.

Comparable same store sales in continental Europe increased 0.9% and soared 11.9% in the U.S.