World Stocks Rally on European Central Banks’ Comments

World stocks shrugged off worries about political turmoil in Egypt and rallied strongly Thursday on optimism that the easy monetary policy of central banks in Europe is set to continue for some time. U.S. markets were closed for  July 4.

The biggest gains were in Britain, where the Bank of England surprised markets after its first monetary policy meeting held under new governor Mark Carney. It said afterward that expectations it would raise rates in coming months were unwarranted, despite the improving economic backdrop.

Meanwhile, the European Central Bank kept rates at record lows in light of the eurozone’s ongoing recession, with President Mario Draghi saying for the first time that they will remain there “for an exended period of time.”

Stocks surged after each statement.

Britain’s FTSE 100 index jumped 3.1 percent to close at 6,421.67. Germany’s DAX rose 2.1 percent to 7,994.31. France’s CAC 40 gained 2.9 percent to 3,809.31.

The central bank statements contributed to strong declines in the euro and British pound against the dollar. Looser monetary policies tend to weaken a currency as low interest rates mean lower returns on investments and more attractive opportunities can be found elsewhere. The euro fell 0.7 percent to $1.2916, while the British pound fell 1.4 percent to $1.5066.

Financial shares were among the strongest gainers, with Royal Bank of Scotland PLC stock rising 5.1 percent, Barclays PLC up 4.7 percent and HSBC PLC up 4.6 percent.

“Global markets stormed ahead today as … Draghi confirmed that interest rates will be kept at current record lows or even further lowered in order to inject more liquidity into struggling eurozone nations,” said Spreadex trader Shavaz Dhalla in a note on markets.

However, “there is still the concern that volumes are thin today, owing to the U.S market being closed.”

Earlier in Asia, Hong Kong’s Hang Seng index was the strongest gainer, rising 1.6 percent to 20,468.67. China’s Shanghai Composite rose 0.6 percent to 2,006.10.

Tokyo’s Nikkei 225 bucked the trend, slipping 0.3 percent to 14,018.93, despite remarks from Bank of Japan governor Haruhiko Kuroda that the country’s economy is headed for recovery.

The dollar gained fractionally against the yen, just passing the 100-yen mark to 100.01 yen.

Investors around the world were also keeping a close watch on the oil price, which has passed $100 per barrel due to Wednesday’s events in the Middle East. Egypt’s military overthrew Mohammed Morsi, the country’s first democratically elected president, after he defied calls to resign despite the demands of millions of protesters.

Egypt is not an oil producer, but its control of the Suez canal — one of the world’s busiest shipping lanes, linking the Mediterranean with the Red Sea — gives it a crucial role in maintaining global energy supplies. High energy costs act as a drag on economic growth, but oil has eased somewhat from its Wednesday highs and was down 25 cents to $100.99.

The Bank of England and ECB statements also led to lower government bond yields in Southern Europe, where fears have been brewing that a crisis in Portugal’s governing coalition could bring Europe’s debt crisis back to a boil.

“These actions should help limit increases in bond yields in the U.K. and Europe, even as Treasury yields grind higher amid Fed tapering speculation,” said BMO economist Benjamin Reitzes.

Over the past few weeks, markets have sputtered amid speculation that the U.S. Federal Reserve might taper off its policy of buying $85 billion in bonds every month to keep interest rates low and encourage spending.

But on Wednesday, unemployment and jobs data out of the U.S. were just right for stocks, analysts said — good enough to restore confidence that the U.S. economic recovery is continuing, but not so good that the Fed is likely to pull back on stimulus.

“We have had a period of extreme volatility, and now we have some settling going on,” said Lorraine Tan, director at Standard & Poor’s equity research in Singapore. “I think there’s a realization that the [negative] reaction may have been overdone.”

This article appeared in print on page 8 of the July 5th, 2013 edition of Hamodia.