Sensex soars 337 pts; markets rise worldwide
Global equity markets roared into rally mode on Friday after the European Central Bank (ECB) president Mario Draghi?s Thursday statement that the ECB would make unlimited bond purchases to support the region?s interest rate markets and help revive the eurozone area. The sentiment in Asia was strong on Friday with Japan?s Nikkei, Korea?s Kospi, India?s Nifty and China?s Shanghai Composite index not only opening way higher than Thursday?s close but also sustaining the gains till the end of the session. While the Shanghai Composite added 3.7% after soaring 4.5% intra-day, other markets rose between 1.5% and 2%.
The Sensex surged 337.5 points to close at 17,683.73; India has been among the better-performing markets so far in 2012. Strategists, however, are somewhat concerned that too much liquidity could push up commodity prices. ?While the markets could benefit near term if we get a ?risk-on? rally globally, we are skeptical on the sustainability of any sharp rally, especially if we get a rise in global commodity prices,? Bank of America Merrill Lynch wrote in a report on Friday. BoA-ML is worried that could hurt India?s already fragile economy. ?We continue to expect markets to remain range-bound with a weak economy, earnings and reasonable valuations providing an upper cap,? the report noted.
Meanwhile, the mood in Europe stayed positive with benchmark indices ? the UK?s FTSE 100, Germany?s DAX and France?s CAC ? up between 1% and 2% in mid-day trades on Friday after closing 2-3% higher on Thursday. The US market opened flat on Friday after the S&P 500 and the Dow Jones Industrial Average both closed at a four-and-a-half year highs on Thursday, clocking in gains of 2%.
Fund managers chose to put risk on the table so that even economies struggling to stay solvent, including Portugal and Italy, saw their markets trade higher by as much as 2% on Friday after putting on 3-5% on Thursday.
On Thursday, the ECB announced a new bond-buying programme ? Outright Monetary Transactions ? by which the central bank will buy short-term bonds of between one and three years of maturity without limits. The purchases are to be fully sterilised, assuring a neutral impact on the money supply.
The ECB also left its benchmark interest rates unchanged at a record low of 0.75% with Draghi saying the programme will enable policy makers ?to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors about the reversibility of the euro.?
Purchases may also be considered for euro-area countries currently under bailout programme, such as Greece, Portugal and Ireland, when they regain bond-market access, Draghi said.
European stocks extended gains even as the yields on the riskier eurozone sovereign debt fell sharply and the euro traded at 1.2750, its highest in more than three months. Yields on Spanish and Italian 10-year notes witnessed their sharpest weekly fall in at least a year to 5.7% and 5.1% respectively, their lowest since April this year. Even banking stocks of the euro region moved up, with the Bloomberg Europe Banks and Financial Services Index gaining as much as 7% in two days to Friday. Some of the leading banking stocks from the region, including Commerzbank AG, Deutsche Bank and Credit Agricole added 12% to 16% in the period.
The latest ECB move reinforced market confidence in the monetary easing measures that global central banks are ready to take to bolster ailing global economic growth and avoid a spill-over of Europe?s debt crisis.
In the last week of August, US Federal Reserve chairman Ben Bernanke in his Jackson Hole speech had indicated that the Fed will provide additional accommodation as needed to ensure progress on economic growth and job creation. He defended the policymakers? decision to carry out the first two rounds of quantitative easing (QE1 and QE2) saying that they aided GDP growth by 3% and fostered employment by two million jobs.
In February, the ECB had carried out a second round of Long Term Refinancing Operations (LTRO) to help the stressed banking sector. Through the two rounds of LTRO, the central bank has provided 1 trillion euros worth of liquidity to European banks since December 2011.
