Rates on Hold, ECB to Buy Unlimited Euro Zone Bonds

Arthi Gupta
06 Sep, 2012
New York City

European Central Bank left its key lending rate unchanged and announced a plan to buy unlimited amount of government bonds. The widely expected move dragged the yields of Spain and Italian bonds lower and lifted market indexes. Generali agreed to sell its stake in Migdal for

[R]3:25 PM Frankfurt – European Central Bank left its key lending rate unchanged and announced a plan to buy unlimited amount of government bonds. The widely expected move dragged the yields of Spain and Italian bonds lower and lifted market indexes. Generali agreed to sell its stake in Migdal for €705 million.[/R]

European Central Bank left its key lending rate unchanged at 0.75% and President Mario Draghi announced a plan to buy unlimited government bonds.

The central bank has increased rates three times since Draghi took office in November and the bank has run out of conventional measures to support the economies of the member nations.

Draghi also said at a conference that the bank is prepared to purchase bonds of member nations to keep the rising yields in the region under check. The widely anticipated move is expected to keep the yields of Spanish and Italian bonds lower and help struggling nations to refinance the debt at a manageable cost.

Separately, the Bank of England policymakers also meet today.

Spain successfully raised €3.5 billion in a bond sale today at lower borrowing costs. Italian and Spanish yields declined after the ECB announcement.

OECD Warns of Global Recession

The Organization for Economic Co-operation Development warned that the continuing euro area crisis is dampening global confidence, weakening trade and employment and slowing economic growth for OECD and non-OECD countries alike.

The OECD projects that the euro area’s three largest economies, Germany, France and Italy will shrink at an annualized rate of 1% on average during the third quarter and at 0.7% in the fourth.

In Paris trading, the CAC-40 Index gained 33.83 or 1% to 3,439.62 and in Frankfurt the DAX Index edged higher 90.73 or 1.3% to 7.055.51.

The yields on Spain’s benchmark 10-year fell 16 basis points at 6.46%. Italian 10-year yields fell 14 basis points to 5.54%.

Spanish Bond Auction

Spain''s borrowing costs fell in a bond auction today.

The Spanish Treasury raised €3.5 billion from the auction of bonds maturing in 2014, 2015 and 2016. This matched the upper end of the target range of €2.5 billion to €3.5 billion.

The Treasury sold €682 million of securities maturing on April 2014, at an average yield of 2.798% compared to 4.706% at the previous auction in June. The bid-to-cover ratio fell to 2, from 4 in the last auction.

Spain raised €1.4 billion from the issue of bonds maturing in July 2015. The average yield dropped to 3.676% from 5.086% at its last auction in July. The bid-to-cover ratio declined to 1.8 compared to 2.3 in the prior issue.

The country also sold €1.4 billion of bonds maturing in October 2016 at an average yield of 4.603% compared to 5.971% last month. The bid-to-cover ratio fell to 1.9 from 2.7 in the previous sale.

Euro Zone Economy Contracts

The euro zone economy contracted in the second quarter, data released by statistics office Eurostat showed today.

Gross domestic product decreased 0.2% in the euro area and 0.1% in the EU27 during the second quarter compared with the previous quarter, according to second estimates released by Eurostat today. In the first quarter, growth rates were 0.0% in both zones.

Compared with the second quarter of 2011, seasonally adjusted GDP decreased 0.5% in the euro area and 0.3% in the EU27, after 0.0% and +0.1% respectively in the previous quarter.

German Factory Orders Rise

Germany''s factory orders rose more than the estimated 0.5% in July, following a 1.6% drop in June, data from the Federal Ministry of Economy and Technology showed.

Gainers & Losers

Air Berlin Plc slumped 3.4% to €1.69 after the German airline said it increased its capacity utilization for the first eight months of the year to 79.25%, an increase of 1.2% over the prior year.

The company welcomed a total of 3.57 million passengers on board in August, 5% less than 3.76 million passengers in the year-ago month.

Assicurazioni Generali SpA rose 1.7% to €11.67 after the insurance company agreed to sell its entire 69.13% stake in Migdal Insurance and Financial Holdings to Eliahu Insurance Co. Ltd. by the end of October for €705 million.

Bayer AG edged higher 2.3% to €64.36 after its subsidiary Bayer CropScience acquired a wheat breeding station in Milly-la Foret near Paris from the privately-owned company RAGT Semences S.A.S.

International Consolidated Airlines Group, S.A. rose 1.7% to 142.10 pence after the airline company’s wholly-owned subsidiary, British Airways, and Australia''s Qantas Airways Ltd. have agreed to terminate their joint business at the end of March 2013. This follows Qantas’ announcement that it is entering a new global partnership with Emirates.

Merck KGaA increased 1.5% to €93.26 after the chemical and pharmaceutical company signed an exclusive worldwide license agreement with Denmark-based Symphogen A/S for Sym004, an investigational antibody mixture targeting the epidermal growth factor receptor.

Nokia Oyj plunged 3.6% to €1.92 and the Finland-based mobile phone maker launched two new Lumia smartphones that will run on Microsoft Corp.''s latest Windows Phone software that failed to win over investors.

The European Aeronautic Defence and Space Company N.V. climbed 0.7% to €30.14 and the aerospace and defense contractor announced the new group executive committee.