Europe’s main stock exchanges retreated on Thursday and the euro currency surged against the U.S. dollar after the European Central Bank (ECB) announced it would begin a process of quantitative tightening early next year.
The ECB said on Thursday that starting in March, it would sell off around 15 billion euros (15.9 billion U.S. dollars) in national bonds each month as a way to raise interest rates, reduce the money supply and rein in inflation. Quantitative tightening is generally seen as a drag on near-term economic growth.
Financial markets responded negatively across the board, with the DAX blue-chip index on the Frankfurt Stock Exchange ending the day down 3.3 percent, the IBEX-35 in Madrid retreating 1.7 percent, Paris’ CAC-40 losing 3.1 percent, the Italian Stock Exchange’s MIB-40 shedding 3.5 percent of its value, and the AEX blue-chip index in Amsterdam slipping 3.2 percent.
The euro currency strengthened on the news, opening Thursday’s session at 1.068 U.S. dollars per euro before surging to 1.0726 U.S. dollars per euro in afternoon trading before bargain hunters set in. The euro still finished the day up slightly, at 1.0624 per U.S. dollar.
The euro has been hurt against the U.S. dollar over the last year due to monetary policies from the U.S. Federal Reserve that have been more restrictive than those from the ECB.
But it was bond markets where the most substantial impacts were felt. The ECB’s announced actions will add to the supply of national bonds available to investors, meaning national treasuries will have to pay higher interest rates in order to attract buyers.
The benchmark ten-year bonds finished the day higher across the 19-nation euro currency zone, with the most highly indebted countries hurt the most due to those countries’ dependence on bonds to finance their debt.
Yields in Italy climbed 29 basis points to 4.14 percent, while in Greece they surged 14 basis points to 4.18 percent. In both cases, the spread between the yield on their debt and yields in Germany, Europe’s largest economy, grew. Higher yields reflect investor nervousness over a country’s capacity to keep its debt payments current.
In the case of Italy, Thursday’s developments were exacerbated by news from the Bank of Italy, which revealed that the country’s public debt totaled 2.77 trillion euros at the end of October, the highest debt level on record. That is an increase of 1 percent — 27.7 billion euros — compared to a month earlier.
European economies have been hit hard this year by rising prices sparked by the ongoing conflict between Russia and Ukraine, which has reduced energy supplies, hurt markets for wheat and other grains, and interrupted international supply lines.
The ECB has said that keeping prices under control is its main policy goal, even if those policies limit economic growth prospects. (1 euro = 1.06 U.S. dollar)
