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ECB Announcement Leads to Massive Rally

THURSDAY MARKET UPDATE: The announcement of a new ECB bond-buying programme gave a big boost to global markets

Alanna Petroff 6 September, 2012 | 6:41PM Jeremy Glaser

Global stock markets soared on Thursday after the announcement of a new European Central Bank (ECB) bond-buying programme.

As was broadly expected, ECB president Mario Draghi announced a plan to purchase sovereign bonds with maturities of one to three years in an effort to bring down borrowing costs for beleaguered eurozone members. The programme will only apply to bonds from countries that have accepted some form of bailout from the European Financial Stability Facility (or the future European Stability Mechanism) and that are in compliance with the terms of the bailout. The ECB has also agreed to be treated the same as private creditors if a bond restructuring is necessary.

The FTSE 100 index reacted by posting a triple-digit rally, rising by 119 points, or 2.1%. The benchmark index is now closed at 5,777. Financials and mining companies were the main risers on the large-cap index, with Evraz (EVR) shooting up by just over 7%. Shares in Lloyds Banking Group (LLOY) also spiked by nearly 7%. 

The mid-cap FTSE 250 index charged ahead by 230 points, or 2%, to close at 11,676.

In France, the Paris CAC 40 index soared by 3.1% while Germany's DAX was up by 2.9%.

"Optimism is in plentiful supply this afternoon, as markets take on board some of the finer points of Mario Draghi's latest plan to save the euro ... Given the sheer level of anticipation surrounding today's meeting, you could be forgiven for thinking that markets would have lost ground, but for today at least, 'buy on the rumour, sell on the fact' has been rendered redundant," said Chris Beauchamp, a market analyst at IG Index.

Now Spain and Italy will have to respond to Draghi's proposals.

"The ball is now firmly back in the court of Spain, which must now sign up to a programme or ‘enhanced conditions credit line’. Any prevarication would lead to a big sell-off, which Rajoy can ill-afford," said Tristan Cooper, a European sovereign credit analyst at Fidelity Worldwide Investment. “Then the spotlight moves to Italy, which will find it very difficult to stay out of programme if Spain goes in."

The ECB also announced it would be keeping interest rates on hold, with the main rate on refinancing operations staying at 0.75%. 

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About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.