ECB boosts European stocks

The interest rate cut by the European Central Bank (ECB) has sent European stocks surging ahead.

The ECB cut interest rates from 0.5% to 0.25%, in a move that took some traders by surprise. According to a survey by Bloomberg, only three of the seventy economists they asked predicted an interest rate cut. The move comes only two days after the EU Commission lowered its growth forecast and warned that unemployment in the eurozone will remain high for a few years.

Interest rate cuts can be viewed from two different perspectives. On the one hand, it becomes cheaper to borrow money to invest in equities, and this explains why dealers bought stocks on the back of the announcement. However, looking beyond the next few weeks, this rate decision could be an indication that the eurozone is still struggling, so we could a see a reversal in the coming weeks.

The German market has benefitted most from the ECB decision. The Frankfurt index is up 1.3%, as Germany is relatively well-positioned compared to other countries. Meanwhile, the Italian equity market is up only 0.4%, which suggests Italy’s economy is more in need of stimulus than Germany’s.

Germany 30 chart

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.