Shares hit five-month high on ECB plan

Thu, Sep 6, 2012, 01:00

The euro dipped but European shares hit a five-month high after the European Central Bank unveiled a new plan to tackle the region's debt crisis, while strong US private-sector jobs growth boosted Wall Street.

ECB president Mario Draghi said the central bank would undertake unlimited, short-dated bond purchase under strict conditions to ease funding pressures on governments that sought help. He added that the ECB and would not expect better treatment than other creditors in the case of default.

"Generally, I think it's a positive," said Peter Westaway, chief economist for Europe at Vanguard Asset Management.

"There is a long-term question of whether this will be enough to meet the long-term financing needs of Italy, and that probably remains."

The euro fell to its lows for the day after the announcement before settling down 0.25 per cent at around $1.2570 and below last week's peak of about $1.2638, which was its highest level since early July.

The EuroSTOXX 50 index of euro zone blue-chip stocks , which closely tracks swings in sentiment in the 17-nation currency bloc, was up about 2.4 per cent at 2,500.15 points, its highest level since early April.

The broader, pan-European FTSEurofirst 300 index rose 1.6 per cent at 1,096.75 points, adding to gains made earlier in the session.

"I think the market had been building itself up for a much more concrete resolution, and though the snap reaction from the market has been pretty sanguine, it certainly hasn't sent the markets off to the races," said Richard Hunter, Head of UK equities at Hargreaves Lansdown.

In the debt markets, safe-haven US treasury and German government bond prices, which had dipped before the ECB announcement, edged down further, while peripheral euro zone bond prices moved higher.

As a result 10-year German Bund yields were up 8 basis points at 1.5 per cent today, with equivalent Spanish and Italian debt yields dropping to 6.1 and 5.32 per cent, respectively. .

Earlier the prospect of future central bank buying also ensured successful debt sales by Spain and France.

Spain sold €3.5 billion of shorter term debt and France shifted €7.98 billion of five-, 10- and 15-year bonds, with both auctions resulting in lower yields than at previous sales. The drop was sharp at the Spanish auction.

Commodity prices followed other risk assets higher on signs of improvement in the US labour market ahead of Friday's August US payrolls report.

US private employers added a stronger-than-expected 201,000 jobs in August, and new claims for jobless benefits fell last week to the lowest level in a month, upbeat signals for a struggling labour market.

The increase in private hiring, reported by payrolls processor ADP, was the largest since March. However, economists still think the government's more comprehensive employment report due tomorrow will show only modest hiring during August.

In early trade the Dow Jones industrial average gained 90.05 points, or 0.69 per cent, to 13,137.53. The Standard & Poor's 500 Index rose 8.58 points, or 0.61 per cent, to 1,412.02. The Nasdaq Composite Index climbed 23.09 points, or 0.75 per cent, to 3,092.36.

Brent crude futures had climbed $1.38 to $114.48 per barrel. US crude gained $1.74 to $97.10 a barrel.

However, gold edged away from its highs as the strong jobs data dents the case for a third round of monetary easing, also known as quantitative easing (QE3), by the Federal Reserve. Spot gold was virtually unchanged on the day at $1,700.70 an ounce, still near six-month highs.