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ISEQ soars-Draghi takes decisive action

Friday, September 07 09:19:31

The ISEQ has soared again this morning and is currently trading around 3,269, a rise of a further 42 points on top of yesterday's increase as markets come to terms with the ECB taking decisive and significant action to stem the decline of the Euro area.

Davy Stockbrokers takes in a number of aspects of the last 20 hours and evaluates the long term impact:

As had been anticipated, ECB President Mario Draghi revealed the details of the bank's unlimited bond-buying programme yesterday at the conclusion of its monthly meeting. The programme, to be known as Outright Monetary Transactions (OMTs), was largely unchanged from the one signalled at last month's meeting.

There was one exception: the purchases of short-dated bonds will be sterilised by taking in deposits to offset the increase in the money supply - an obvious nod to the inflation hawks at the Bundesbank. Despite this, Bundesbank President Weidmann again voted against the plans, and was the single dissenting voice at yesterday's meeting.

Where OMTs differ from their predecessor, the Securities Markets Programme (SMP), is in the quantity and conditionality of the ECB's bond purchases. The ECB's purchases will be unlimited in quantity until bond yields return to sustainable levels, but the bank refused to target an explicit level.

The ECB will also forgo its preferred creditor status in the event of default, assuaging investor fears. The crux of the programme lies in the strict conditionality attached to bond purchases and the implications of this. To benefit from the OMTs, a country must first enter an ESM/EFSF programme, with the IMF in a monitoring capacity.

This means that Italy and Spain may be forced to accept further unpalatable austerity in order to bring bond yields back to an acceptable level. On the flip side, bailout countries like Ireland and Portugal can now reap the benefits of the OMTs immediately, with the transition to full market access in 2014 now much smoother for the Irish sovereign as a consequence of yesterday's actions.

Markets reacted positively to the news, with European equity markets closing up and Spanish and Italian bond yields falling despite the potential austerity implications of the OMTs.

Today, markets will look to German and UK industrial production data for July with flat-to-negative growth expected in Germany and a 1-1.5pc rebound expected in the UK, which would still leave industrial production 3-4pc down in both countries on the year. In the US, August's labour market figures should be the final signal for the Fed to conduct QE3, with the unemployment rate expected to remain unchanged at 8.3pc according to Davy Stockbrokers.