European stocks posted the largest weekly advance since June as European Central Bank (ECB) President Mario Draghi outlined an unlimited bond-buying program to regain control of interest rates and stem the sovereign debt crisis.
The benchmark STOXX 600 increased 2.3 percent to 272.3 this week. The gauge has climbed 16 percent from this year’s low on June 4 amid speculation central banks around the world will take further measures to support an economic recovery.
The ECB deal “was a great victory for the periphery,” said Jean-Paul Jeckelmann, chief investment officer at Banque Bonhote & Cie in Neuchatel, Switzerland. “It confirmed that Spain and Italy are too big to fail and that we will find all the resources to keep them alive. We have solved the liquidity side of the problem, but if the economy continues to worsen, the discussion about solvency will rapidly come back. So it’s very good news in the short term, but still holds some risk for the medium term.”
National benchmark indexes rose in all of the 18 Western European markets this week. The UK’s FTSE 100 was up 1.5 percent, France’s CAC 40 added 3.1 percent and Germany’s DAX rose 3.5 percent. Italy’s FTSE MIB rallied 6.7 percent, while Spain’s IBEX 35 jumped 6.2 percent.
The ECB will target government bonds with maturities of one to three years, including longer-dated debt that has a residual maturity of that length, Draghi said. Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, and the ECB will not have seniority, he said.
The program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said at a press conference in Frankfurt on Thursday.
The ECB left its benchmark interest rate at a record low of 0.75 percent this week, as predicted by 28 of 58 economists in a Bloomberg survey. The remainder had forecast a quarter-point cut. The Bank of England kept its rate at 0.5 percent and held its bond-purchase target at ￡375 billion pounds (US$597 billion).