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European shares gain as central banks act

LONDON - European shares and commodities rose on Thursday after China surprised markets by cutting its key interest rates and the European Central Bank followed with a widely-expected rate cut to tackle a downturn in economic activity.

The Bank of England (BoE) said it was holding rates steady at 0.5 percent, but did expand its quantitative easing programme by 50 billion pounds ($77.9 billion), as expected.

The euro fell around half a percent after the announcements to a day’s low of $1.2440 as investors worried that the move was too small to make much difference in the recession-hit region.

“Today’s ECB interest rate cut does little to alter the bleak economic outlook and the bank is unlikely to announce any bolder unconventional measures for now,” Jennifer McKeown, Senior European Economist with Capital Economics said.

The ECB’s 25 basis point rate cut rate was widely expected, but its decision to cut the deposit rate it pays to banks to zero was more of a surprise.

Analysts said this move could encourage banks to lend to each other rather than simply parking funds of up to 800 billion euros back at the ECB every night.

ECB President Mario Draghi will explain the Governing Council’s decision at a 1230 GMT news conference.

Draghi’s news conference will also be closely watched for any hints the ECB could begin buying troubled euro zone bonds again under its securities markets programme (SMP), or conduct another long-term refinancing operation (LTRO) to inject funds into the financial system.

Share gains limited

European shares hit a fresh two-month high after the Chinese rate cut and extended those gains slightly when the ECB announced its decision, but prices soon began to edge back on worries the moves could signal further bleak economic news ahead.

The FTSEurofirst 300 index of leading European shares was up 0.4 percent at 1,050.04 points, having already gained 2.7 percent this week on hopes of central bank action.

The MSCI world equity index, which gained briefly on the Chinese rate cut, was flat at 316.04 points after a quieter session in Asia earlier.

Spot gold was mostly steady after a brief gain on the Chinese rate move to be $1,615.75 an ounce, and copper trading on the London Metal Exchange was up about 0.4 percent at $7,757 per tonne.

Brent crude rose $1.50 to $101.26 a barrel.

However, the commodity-linked Australian dollar hit a two-month high against the US dollar.

Debt for sale

In a busy day for European government bond auctions, Spain found it had gained little benefit from a euro zone leaders’ deal aimed at helping the bloc’s most troubled economies, with Madrid forced to pay the highest rates in over seven months to borrow 10-year funds.

Demand was solid at the auction of 3 billion euros ($3.75 billion) of new debt but yields on the longer-dated bonds rose to 6.43 percent.

“The market continues to function, but on this evidence there is still no significant change in sentiment or investor demand towards Spanish debt,” said Peter Chatwell, a rate strategist at Credit Agricole

The auction was the first real test of sentiment toward the recession-hit country since European leaders agreed last week to allow the bloc’s bailout funds to buy bonds in the secondary markets and directly recapitalise ailing banks.

Spanish 10-year yields in the secondary markets rose nearly a quarter of a percentage point after the auction to 6.64 percent, with the Italian equivalent up 12 basis points at 5.88 percent.

Meanwhile French borrowing costs held close to historic lows at its auction 7.8 billion euros of new bonds a day after it announced hefty tax rises on wealthy households to try to bring its growing budget deficit under control.

Ireland also returned to short-term debt markets on Thursday for the first time since before its EU/IMF bailout in November 2010, paying less for three-month paper than Spain.

In Athens the new Greek Finance Minister Yannis Stournaras publicly acknowledged that the debt-laden country had partially veered off course from pledges included in its 130-billion-euro rescue package area nation

Greece is trying to persuade its trio of international lenders - the European Union, European Central Bank and International Monetary Fund - to ease the punishing terms of the bailout to save the debt-laden country from bankruptcy.

After Europe’s central bank decisions, markets will turn to Friday’s key monthly US jobs report for clues over whether the Federal Reserve will take additional easing steps. Non-farm payrolls were expected to see an addition of 90,000 workers in June, with the unemployment rate holding steady at 8.2 percent.