European markets opened the session on the highs followed by a sharp decline after the European Central Bank announces plans to begin quantitative easing and the Bank of England increased their asset purchase program while leaving their interest rates the same.
Europe Session Key Developments
• ECB President Jean-Claude Trichet Announces Plans to Purchase €60 billion Worth of Bonds
• BoE Leaves Interest Rates Same; Expands Asset Purchases by another £50 billion
• Bank Stress Test to be Released after US Trading Session – Unable to Meet Expectations Will be Detrimental
European markets opened the session on the highs followed by a sharp decline after the European Central Bank announces plans to begin quantitative easing and the Bank of England increased their asset purchase program while leaving their interest rates the same. After a gag-order issued by ECB president Jean-Claude Trichet to other policy officials, the central bank has reached a decision to reduce interest rates by 25 basis points, dropping the benchmark rate to a record low of 1.00%. Since the cut was already anticipated by market participants, the significant market-mover for the day was Trichet’s announcement that the ECB will begin purchasing €60 billion worth of “euro-dominated covered bonds issued in the euro area.” If the new program proves to be successful, we may see additional expansion in quantitative easing. Such a move can be seen at the Bank of England today as their statement indicates no change in interest rates and an increase in the amount of funds for asset purchasing by £50 billion. With the LIBOR-OIS spread dropping to 77 basis points, the central bank’s decision to purchase gilts have been effective to stabilize credit markets and gave policy makers more reason to boost quantitative easing efforts. Looking ahead, markets will be expecting the US stress test results to be released after the current US trading session. However, there has been an attempt to alleviate the significant impact from this event by leaks indicating 10 out of the 19 tested banks will require additional capital. Taking these expectations into consideration, if the report shows more than 10 banks need additional funds, markets will react violently to the downside on the bearish news.
FTSE 100 4,398.68 +2.19 +0.05%
The FTSE closed the day with marginal gains as the sector had even amount of winning and losing sectors. Telecommunications, Technology, and Consumer Services were the leading bear sectors with 4.42%, 1.59% and 1.36% losses, respectively. Consumer Goods helped boost the index up with a 2.00% gain. The rally was contributed by Unilever, world’s second-largest consumer-products company with a 9.82% jump as first-quarter sales beat expectations. Lloyds TSB, UK’s provider of checking accounts fell 14.31% after the company announced a forecast of 50% increase in bad loans.
CAC 40 3,251.52 -31.99 -0.97%
France’s leading index dropped slightly with Technology, Financials and Basic Materials leading the index lower with over 2% losses. Societe Generale, France’s third-largest bank was one of the top losers for the day, dropping 9.79% as the bank posted a 1Q loss. Axa, Europe’s second-largest insurer also fell from the bearish news, falling 6.4%. Not all stocks fell as Veolia Environnement, world’s largest water company rose 0.99% after their 1Q profits did not disappoint estimates.
DAX 4,804.10 -76.61 -1.57%
German equities had the largest loss with all sectors closing in the red. Every sector besides Health Care had at least a 1% drop. E.ON AG, Germany’s biggest utility company and MAN AG, Germany’s largest retailer led the index lower with a 7.83% and 4.28% decline, respectively. Commerzbank, rose 9.01% as the bank was told to sell its commercial property unit to gain funding from the German government.
IBEX 35 9,228.90 -0.10 +0.00%
Spain’s stock market closed the day with only a miniscule negative change, not being able to move the index by at least 0.01%. The only three sectors to move more than 1% were Basic Materials, Technology and Consumer Services with a 1.06%, 2.16% and 2.43% loss. Group Ferrovial and Abengoa helped lead their sectors higher with gains of 5.94% and 5.70%. Bolsas Y Mercardos Espanoles was one of the top losers with a 7.02% drop.
S&P/MIB 19,814.00 -290.00 -1.44%
Italy’s leading index posted a loss for the day with Basic Materials being the only sector closing with a gain. Industrials, Consumer Goods and Consumer Services led the index lower with 2.80%, 2.94% and 3.00% loss, respectively. Fiat was one of the top losers, falling 5.20% percent as investors speculated that Fiat will have great competition in Europe with Opel. Prysmian, an Italian energy-cable maker controlled by Goldman Sachs also lost 4.82% as copper prices fell in New York.