European stocks declined on Monday after the European Central Bank enacted its largest economic stimulus plan ever.
Monday, March 9, 2015
The bank’s plan to purchase government bonds – a process known as quantitative easing – came during debt crisis talks between Greece and its European creditors.
Stocks had been performing well. On Friday, the Stoxx Europe 600 gained by 0.1% to hang onto its strongest level in about eight years. But the risk of a Greek exit or a failure to reach an agreement remains heavy on investors’ minds.
“Judging by the performance of markets, the ECB’s commitment to buy euro-area assets in enormous quantities has obviously won out, with the ongoing issues in Greece simply being seen as a nuisance in the background,” Dermot O’Leary, chief economist at Goodbody Stockbrokers, told MarketWatch. Still, the “bottom line here is that the risk of an accident in Greece remains a very real one,” O’Leary continued. “It is clear that a third bailout will also have to be thrashed out over the coming months.”
As a result, the Stoxx Europe 600 dropped 0.6% on Monday. Germany’s DAX 30 lost 0.2%, France’s CAC 40 fell 0.4% while the UK’s FTSE 100 declined 0.6%. Greece’s Athex Composite Index fared worst of all, losing 3.3%.
ECB begins economic stimulus plan
Times are changing in the eurozone. The ECB has launched a massive QE program in an effort to stave of deflation and kick-start the economy, while the US prepares to raise interest rates as early as June, reported The Wall Street Journal. That means the euro is falling and the dollar is rising and investors have shown their preference for American assets. The last time the euro exchanged for $1 USD was in November 2002.
The weak euro is a good thing for the region by boosting exports demand while also lifting import prices – thereby stoking inflation, a nagging weakness in the eurozone. But bond markets in the eurozone’s financial core – like Germany and Finland – now trade with a negative yield, meaning investors pay to retain them.
However, ECB President Mario Draghi promised that his bank would purchase bonds even with negative yields, provided they did not dip below the ECB’s deposit rate of negative 0.2%.
Investors prepare for the new European economy
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