Draghi Sparks Euphoria in Europe's Markets With Stimulus Hints

ECB's Draghi Hints at Additional Stimulus in 2015
  • Draghi says ECB will investigate stimulus measures in December
  • Euro tumbles the most since March; stocks jump with bonds

European Central Bank President Mario Draghi got instant gratification from markets with his signal that more stimulus may come by the end of the year.

All European markets were caught up in the Draghi-inspired euphoria. Stocks jumped the most in more than two weeks, and the cost of insuring corporate debt fell to the lowest levels in a month, as the policy chief said the ECB will reexamine its current policy stance in December.

Germany’s two-year note yield plunged to a record, and money markets also rallied, after Draghi said that the Governing Council had discussed cutting its deposit rate. As investors readied themselves for more stimulus, the euro tumbled the most since March, easing one of the region’s deflationary forces.

The market reaction, particularly in the euro “is an achievement for Draghi and his latest speech,” said Christian Reicherter, an analyst at DZ Bank AG in Frankfurt. “The ECB has to deliver now in December.”

The euro slid 1.8 percent to $1.1132 as of 5:39 p.m. London time, the biggest drop since March. Germany’s government bonds rallied with the 10-year yield falling below 0.5 percent, while Italian and Spanish bonds gained at an even faster pace, narrowing Italy’s 10-year yield premium over bunds to 96 basis points. The euro-area’s two-year interest-rate swap dropped below zero.

The Stoxx Europe 600 Index jumped to the highest since August, while the Markit iTraxx  Europe Crossover Index of credit-default swaps on high-yield companies declined to 316 basis points, as traders sought riskier assets.

Yield Spread Falls Below 1 Percentage Point
Yield Spread Falls Below 1 Percentage Point

“The degree of monetary-policy accommodation will need to be reviewed at our December meeting when new macroeconomic projections will be available,” Draghi said at a press conference in Malta. “We want to be vigilant, as people used to say in the old times.”

The ECB is currently engaged in a 60-billion-euro monthly bond-buying program that is so far scheduled to last until September 2016. The central bank’s deposit rate was cut in September 2014 to minus 0.2 percent.

Germany’s two-year yield which has been below the deposit rate since Sept. 3, fell to a record minus 0.322 percent during Draghi’s speech.

“The door for more monetary stimulus is wide open,” said Carsten Brzeski, chief economist at ING-Diba in Frankfurt. “Everything is possible.”

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