European stocks reverse losses on reassuring tone from ECB
European stocks erased most losses after the European Central Bank said it will slow down the pace of its pandemic bond-buying programme in a sign of confidence in the region’s economic recovery, adding that this move shouldn’t be seen as tapering.
The Stoxx 600 Europe Index closed less than 0.1% lower in London after dropping as much as 0.9% earlier. Healthcare, miners and energy led the retreat. Real estate, consumer products and industrials were among the top gainers.
The ECB on Thursday decided to conduct purchases at a “moderately lower pace” than in the previous two quarters.
Officials also reiterated a pledge to keep the €1.85 trillion programme running until March 2022 or later if needed, signalling they’re not yet ready to discuss how and when to end emergency stimulus. This is a relief for equity investors that have been concerned that stimulus measures might get pulled back more quickly.
“The ECB is slowing the pace of its emergency asset purchase program. But this is not a tapering decision,” said Elga Bartsch, head of macro research at the BlackRock Investment Institute. “ECB asset purchases look here to stay as the new policy framework paves the way for looser for longer monetary policy in the euro area.”
The ECB President Christine Lagarde said the economy in the region will return to pre-crisis levels by year-end and that the “increasingly advanced” rebound could be maintained with less monetary help. She also cautioned that the global spread of the delta variant could yet delay the full reopening of the economy.
The rally in the Stoxx 600, which has gained 17% this year, has stalled after hitting an all-time high in August. Equities in the region have fallen with global peers this week on mounting fears over the recovery and reduced support expected from central banks.
“There is a sense of pessimism throughout equity markets. In recent days the rally has seemed to lose momentum,” said Lewis Grant, senior portfolio manager at Federated Hermes. “Fears that the spreading delta strain is curtailing the pace of the post-pandemic recovery, along with the prospect of dwindling central-bank stimulus, has left investors questioning the market’s elevated valuation.”
At the same time, Bank of America Corp. strategists say that despite global risks and seasonal September weakness in equities, elevated cash levels suggest investors have fire power to “put money to work” in case of a dip.
The ECB’s stance sets it apart from that of the Federal Reserve, whose policy makers are preparing to start a wind-down of asset purchases later this year.
“The ECB has taken its first meaningful step towards tapering today. Characteristically, it hasn’t tied itself to a specific pace of purchase, instead retaining an element of flexibility which will be helpful in the face of a potential tightening in financial conditions as Fed taper draws near,” said Seema Shah, chief strategist at Principal Global Investors.
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