Monday 21 August 2017

After a week of swings and ECB stimulus measures, investors start to put faith in Draghi's latest moves

Equities rallied on Friday after a late-day rebound on Thursday erased a sell-off in the wake of expanded measures announced by the ECB
Equities rallied on Friday after a late-day rebound on Thursday erased a sell-off in the wake of expanded measures announced by the ECB

Roxana Zega and Dani Burger

Stockmarkets joined a global rally, poised to erase a weekly decline as investors reassessed Mario Draghi's stimulus measures and warmed to the steps taken to boost growth.

The Standard & Poor's 500 Index rose 0.9pc in early trading in New York, after lurching on Thursday between gains and a loss of as much as 1pc.

"Any aggressive moves to stimulate growth to keep expansion on track is positive," said Joe Quinlan, chief market strategist at US Trust, Bank of America Private Wealth Management.

"Global recessionary fears have receded, and that has been key. What the ECB did last week helped that momentum. What's key for US investors is the euro-dollar rate, and that's back up - which is good news for US earnings and for affiliates of multinationals."

Equities rallied on Friday after a late-day rebound on Thursday erased a sell-off in the wake of expanded measures announced by the European Central Bank, along with comments by President Mario Draghi that suggested further cuts to interest rates were not likely.

Investors shrugged off concerns the ECB steps might not be enough to revive growth, and piled back into shares that have carried the S&P 500's recovery from a 22-month low last month, including energy, raw materials, technology and financial companies.

The S&P 500's gains put it on track for a fourth weekly increase, the longest since November. The benchmark has rebounded 9.8pc since a February 11 low and trimmed its 2016 drop to less than 2pc, after losses of as much as 11pc amid concern over China's economic slowdown and a deepening oil rout.

Investor sentiment in the aftermath of the ECB's announcements - swinging from optimism that the stimulus could boost growth, to concerns that the measures would fall short - illustrates the tension in markets, and the challenges central banks face in mollifying them after seven years of unconventional policy manoeuvres.

In the US, the Federal Reserve's two-day meeting this week may shed light on the trajectory of interest rates. While traders are pricing in little chance of a hike on March 16, they have boosted the odds for moves later in the year. The probability of a June move is now 51pc, from less than 2pc a month ago, bolstered by improving economic data, stabilising oil prices and the comeback in equities.

Fed officials have stressed that the pace of rate increases, following December's first hike since 2006, will be gradual and data-dependent. Reports on retail sales, industrial production and housing starts are due next week before the meeting.

"After the sell-off yesterday, there's a bit of green in the market today as people re-evaluated Draghi's implications," said Patrick Spencer, equities vice chairman at Robert W Baird & Co in London.

"The market is now looking forward to the Fed decision next week so it's going to be pretty quiet. The market will continue to recover today in the U.S. This is the most hated bull market ever, but it's all bubbling up back again."

©Bloomberg

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