European Central Bank chief Mario Draghi’s dovish remarks — signalling that the ECB will ease policy again if inflation fails to accelerate — sent European stocks to six-week highs while news that the US and China would resume trade talks at the G20 summit also boosted sentiment.
Mr Draghi hinted at the possibility of new rate cuts or asset purchases if Eurozone inflation did not head back to its targets.
His comments weakened the euro, lowered European bond yields to fresh lows and helped stock markets climb globally. The pan-European Stoxx-600 index closed 1.8% higher, after having fallen as much as 0.5% earlier in the session. It posted its best day in five months. Italy’s Ftmib, France’s Cac-40 and Germany’s DAX climbed more than 2% while most others ended over 1% higher.
The eurozone stocks were particularly boosted, up 2% as exporters in the eurozone benefited from a weakness in the single currency.
News that Washington and Beijing would resume trade talks after a long lull in order to prepare for a meeting later this month pushed up trade-sensitive car shares and basic-resources stocks.
Utilities, which is among the sectors considered as bond-proxies, racked up a 2.3% gain.
“Judging by the tone of Draghi’s speech, it would probably take only a small downward deviation in growth and core inflation, and/or an outsized drop in survey-based inflation expectations, for the ECB to take action,” said Florian Hense, European economist at Berenberg in London.
The rising hopes of a more accommodative stance by the ECB and the US Federal Reserve has helped the Stoxx-600 gain more than 4% so far this month.
All eyes will now shift to the US central bank which is expected to leave borrowing costs unchanged this week, but may lay the groundwork for a rate cut this year.
Mr Draghi’s remarks — marketing one of the biggest policy reversals of his eight-year tenure — provoked the ire of US President Donald Trump.
With four years of unprecedented stimulus to revive the eurozone economy slowly bearing fruit, the ECB had been preparing markets for policy tightening, dubbed “normalisation” — only to see a global trade war derail its plans within months.
The problem is that with rates at record lows and the ECB’s balance sheet already swelled to €4.7 trillion, its remaining ammunition is limited, raising doubts about the likely effectiveness of any further measures.
“In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Mr Draghi told the ECB’s annual conference in Sintra, Portugal.
With just four months left of his term, the slowdown is also a threat to Mr Draghi’s legacy.
His promise in 2012 to do “whatever it takes” to save the euro is widely credited with holding together the currency bloc during the darkest days of its sovereign debt crisis.
Mr Trump accused Mr Draghi of trying to weaken the euro to gain an unfair advantage in trade.
The ECB will use the “coming weeks” to study its options, Mr Draghi said, suggesting that action may come sooner than later.
He dismissed concerns about the ECB’s depleted policy arsenal, particularly the effectiveness of further bond purchases, saying self-imposed limits such as a rule that prevents the ECB buying more than one-third of a particular country’s debt, could be adjusted.