FTSE retreats from 3-month high as ECB’s failure to act disappoints

BRITAIN’S leading FTSE share index fell yesterday, retreating from a three-month high after the European Central Bank (ECB) failed to deliver widely expected stimulus measures to help tackle the Eurozone debt crisis.

ECB president Mario Draghi said the bank would draw up a mechanism in coming weeks to make outright debt purchases to stabilise peripheral euro zone states' borrowing costs but this disappointed hopes for more immediate action.

“The disappointment we all feared arrived. There were no revelations in the press conference. They have taken away the support we thought was coming for higher bond yields,” said IG Index market analyst Chris Beauchamp.

“Markets will remain under pressure for a few weeks to come. It is almost panning out to be a repeat of last August.”

The FTSE 100 fell 19 per cent to 4,791.01 points in early August 2011, its lowest for three years, after a sell-off on fears that Europe's debt crisis would derail the global economy.

The FTSE 100 closed at 5,662.30, down 50.52 points, or 0.9 per cent, having hit a three-month high of 5,746.68 before the ECB meeting. Volume was weak, at 87 per cent of its 90-day average.

While investors anticipate volatile trade for the coming weeks, the expectation that the ECB will soon be able to buy Spanish and Italian bonds on the open market may prevent a similar sell-off to last summer, they said.

“It is going to be very nervous downside trading for the coming weeks,” said BGC Partners market analyst Louise Cooper.

But if he doesn’t say anything (in coming weeks), or if he says something unimpressive then markets could collapse.”

David Jones, chief market strategist at IG Index, said it was almost inevitable that Draghi would disappoint markets.

“It was always going to be rather difficult for him to match the high expectations set last week. Today’s ECB rate decision and press conference duly failed to live up to the hype, as Mr Draghi said there would be no immediate intervention in bond markets. Almost on cue, stock markets fell and bond yields for Italy and Spain spiked higher as investors took fright. It does seem however that the ECB might be laying the groundwork for bond buying in due course, but it will require governments to apply for a bailout first. No prizes for guessing which countries he might have in mind here. Mr Draghi added that the ECB might consider more ‘non-standard’ measures, but he declined to elaborate further.”

Jones believes most investors’ focus will now be on today’s closely watched non-farm payroll data. “Weary investors have now managed to get past both of the key central bank meetings this week, but now attention turns to non-farm payrolls tomorrow, with the US economy forecast to have added 100,000 jobs in July. Embattled bulls will be hoping that this datapoint can help rescue what has been a rather disappointing week,” said Jones.

Miners were the biggest drag on the index, weighed by lower copper prices and negative market sentiment after the ECB meeting. The heavyweight sector dropped 2.4 per cent and shaved around 13 points off the blue-chip index.

Banks, big holders of Eurozone bonds, were also among the session’s biggest losers, dropping 1.3 per cent.

Earlier, UK stocks showed little reaction after the Bank of England held interest rates steady, as expected.