Euro zone stock rally burns out fast after ECB 'bazooka'

President of the European Central Bank Mario Draghi announces the bank's interest rate decision at the ECB headquarters in Frankfurt, Germany, on March 10, 2016.
President of the European Central Bank Mario Draghi announces the bank's interest rate decision at the ECB headquarters in Frankfurt, Germany, on March 10, 2016. PHOTO: BLOOMBERG

NEW YORK (AFP) - European stocks finished decisively lower Thursday (March 10) as initial enthusiasm about ECB stimulus was replaced with doubts about the central bank's plans and the region's outlook.

European equities surged at first after the ECB cut its main interest rate to zero per cent for the first time, and boosted the amount of stimulus it is pumping into the eurozone economy.

But bourses suffered a rapid downturn after the central bank cut its growth and inflation forecasts for 2016 and 2017 and ECB President Mario Draghi said at a news conference that he did not anticipate further interest rate cuts.

Movements on Wall Street were broadly parallel to those in Europe much of the day, with the Dow falling nearly 180 points at one point, before clawing back to near flat at the end of day.

"It's a wild day," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

The ECB's stimulus package overall exceeded the market's expectations, but Mr Draghi's comment on future rate cuts "signals the policy hawks within the ECB continue to wield significant power among the decisions of the central bank," Esiner said.

Analysts also said investors were becoming more skeptical of the potential upside of further monetary stimulus after years of exceptional moves.

"Markets are beginning to wonder about the actions of central banks and about their capacity to save the world economy," said Andrea Tueni, analyst at Saxo Bank.

Frankfurt ended down 2.3 per cent, while Paris lost 1.7 per cent and Milan 0.5 per cent.

The euro also reversed course, rising from a session low of US$1.0822 to US$1.1183 near 2200 GMT.

"The missing element today was forward guidance," said Kathy Lien, analyst at BK Asset Management. "The ECB pulled out all the stops and told the market that they don't 'anticipate more rate cuts.' In other words they're done."

Outside the eurozone, London's FTSE index dropped 1.8 per cent. The US broad-market S&P 500 gained less than 0.1 per cent.

The Frankfurt-based ECB cut its central "refi" refinancing rate to zero per cent from 0.05 per cent.

At the same time, it lowered the rate on its marginal lending facility to 0.25 per cent from 0.30 per cent and on the deposit facility to minus 0.40 per cent from minus 0.30 percent.

The bank also announced it would expand the volume of bonds it purchases each month under its program of quantitative easing to 80 billion euros from 60 billion euros, and include corporate bonds for the first time.

Previous moves announced by the ECB back in December had underwhelmed investors and were perceived by the financial markets as being half-hearted.

Analysts applauded Thursday's action, but said they still might not be enough.

"There is no guarantee that its latest 'bazooka' will be any more effective than previous ones in securing the strong and sustained growth required to eliminate the threat of deflation in the currency union, and allow the peripheral countries to tackle their debt problems," said economist Jonathan Loynes at research group Capital Economics.