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GLOBAL MARKETS-Euro, shares rally as ECB signals action on crisis

by on July 26, 2012 12:31 pm GMT
 

Thu Jul 26, 2012 8:31am EDT

* ECB’s Draghi says to take all action within mandate to
preserve euro

* Euro back above $1.22 versus dollar after the comments

* European shares gain 1.6 percent, U.S. stock futures
higher

* Oil also supported by expectations of Fed easing

By Richard Hubbard

LONDON, July 26 (Reuters) – The euro and European shares
turned sharply higher on Thursday and German bond prices fell
after European Central Bank President Mario Draghi said his bank
was ready, within its mandate, to do whatever it took to
preserve the single currency.

U.S. stock index futures moved higher as well pointing to a
very strong start on Wall Street.

Speculation had been rising that the ECB, which holds a
policy meeting next week, was considering new measures to tackle
the euro zone’s debt crisis as nations such as Spain and Italy
struggle borrow from the capital markets and evidence grows of a
region-wide economic slowdown.

“Within our mandate, the ECB is ready to do whatever it
takes to preserve the euro. And believe me, it will be enough,”
Draghi told a pre-Olympic games investment conference in London.

In a reference to the high premiums peripheral nations like
Spain have to pay to raise funds, Draghi added: “To the extent
that the size of the sovereign premia hamper the functioning of
the monetary policy transmission channels, they come within our
mandate.”

The euro rose more than 1 percent versus the dollar
to $1.2288 after the comments from around $1.2130 beforehand,
and settled to be up 0.9 percent at $1.2265.

The FTSEurofirst 300 index of top European company
shares, which had fallen on disappointing corporate earnings,
rallied to be up 1.6 percent at 1,034.49 points

The MSCI world equity index gained almost
one percent to stand at 306.06 points, and on track for its
first positive session of the week.

Prices for safe-haven 10-year German bonds fell, sending the
yield up five basis points to 1.32 percent from about 1.23
percent prior to the statement..

The dollar, another target for investors seeking safety,
dipped 0.8 percent against a basket of major currencies to
82.877.

ECB BOND BUYING

Analysts said Draghi’s comments could be a reference to
plans to restart the ECB’s bond buying scheme, known as the
Securities Markets Programme (SMP), which has not been used for
months but still exists.

“The ECB appears to be keen to increase the threat of the
SMP being woken from its hibernation period,” said Ken Wattret,
chief euro zone economist for BNP Paribas.

That prospect had an immediate impact on Spanish bonds with
10-year yields falling 40 basis points to 6.8
percent and below the key 7.0 percent threshold widely viewed as
a level unsustainable for a government to fund itself.

But not everyone is convinced this is the plan.

“I think it’s going to be important to see exactly what Mr.
Draghi means,” said Citigroup’s Chief European Economist Michael
Saunders.

“This is the same Mr. Draghi who suspended the Securities
Market Programme and the same Mr. Draghi who, at the last ECB
press conference (on July 5), said that the ECB would not be
engaging in large-scale bond purchases for the periphery
countries,” he said.

Citigroup economists earlier had raised the likelihood of
Greece leaving the euro zone in the next 12-18 months to 90
percent from a 50-75 percent chance previously, putting its
financial problems firmly back onto the market’s radar.

“With Spain and Italy now probably also heading into rescue
programs there’s much greater need to convince the creditor
nations that countries which go off programme – and Greece is
badly off programme – will not be funded,” Saunders said.

European Commission President Jose Manuel Barroso is due to
hold talks with Greek premier Antonis Samaras in Athens later,
as a group of international lenders try to decide whether to
keep releasing funds from a 130 billion euro bailout package or
let the country go bust.

EARNINGS DOWNBEAT

Before Draghi’s comments equity markets had been feeling the
effects of downbeat corporate earnings, with many large
companies pointing to Europe’s crisis as the source of weakening
orders and consumer demand.

German engineering conglomerate Siemens said the
euro zone problems were largely responsible for a 23 percent
drop in quarterly new orders.

The world’s second largest western oil firm Royal Dutch
Shell also missed forecasts, reporting second-quarter
earnings of around $6 billion, down from $8 billion a year ago.

Brent crude oil prices rebounded to over $105 a barrel after
Draghi’s pledge to defend the euro, and other commodities also
saw big gains.

Brent was up $1 at $105.38 a barrel, rebounding
from a low of $103.47 a barrel. U.S. crude was up 83
cents at $89.80 a barrel.

Spot gold was up 0.9 percent to a three-week high at
$1,618.34 an ounce.

Commodity prices were also being supported by expectations
that weak economic data in the United States will prompt the
Federal Reserve to introduce a third round of quantitative
easing (QE).