StockBeat: ECB Bazooka Kills Euro Breakup Risk, but not the Virus

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By Geoffrey Smith — Turning point, relief rally or dead-cat bounce?

That’s the thought occupying most European investors on Thursday after the European Central Bank unleashed its bazooka in the dead of night, announcing a monetary easing program that goes beyond anything it unveiled in the euro debt crisis.

The 750 billion-euro package was accompanied by some overdue clarity from the ECB on its commitment to keeping bond spreads down, banishing fears that the currency union could sleepwalk into a new crisis.

Such bold moves signalled the beginning of the end for the last financial crisis, but markets are still reluctant to start pricing that in until the Covid-19 outbreak shows signs of peaking. With the number of new cases in Italy accelerating on Wednesday and still rising fast elsewhere across the continent, that moment is still some way off.

By 6 AM ET (1000 GMT), the benchmark had rebounded 0.7% to 281.36, giving up over half of its gains at opening. The Italian made the most convincing recovery, risen 3.5%, while the German was up 0.1%. Growing concern over a muddled-seeming U.K. response left the U.K. as the continent’s biggest laggard, losing 0.4%. The midcap index fell even more sharply.

Spanish and Italian banks posted handsome gains as their national bond spreads compressed. Unicredit (MI:) stock rose 5.1% while Bankia (MC:) stock rose 10.8%. The promise of ECB support for corporate debt also helped a sharp rebound in Ryanair (LON:) stock, which rose 7.4%, and hotel operator Accor (PA:), up 5.1%. National telecoms champions, from the Netherlands’  KPN (AS:) to Spain’s Telefonica (MC:) and France’s Orange (PA:), were also up sharply, while BT Group (LON:) and Vodafone (LON:) underperformed.

Fiscal support measures also continue to flood in: the U.S. Senate on Wednesday waved through without changes a $500 billion support package that majority Republicans only a week ago were dismissing as a ‘liberal wish list’. Meanwhile, the German government on Thursday announced another 40 billion-euro package of measures to support small businesses.

The German move followed the early release of the closely-watched Ifo business sentiment index for March, which predictably recorded its sharpest ever monthly drop. Both the current assessment and the expectations component dropped significantly, with expectations at the lowest level since January 2009, ING economist Carsten Brzeski noted.

Brzeski warned though that such indicators “are nothing more than a snapshot” that say nothing substantial about the future.

“The depth of the recession will be determined by how long the virus outbreak and the lockdowns will last,” Brzeski said in a note to clients. “Government measures taken over the last few days as well as the ECB’s measures last night and last week should somehow cushion the plunge but are even more important in paving the way for any recovery if and when the worst is behind us.”

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