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European, Asian markets up on hopes of extra stimulus

European Central Bank President Mario Draghi And Other Key Speakers At The European Banking CongressEuropean Central Bank President Mario Draghi And Other Key Speakers At The European Banking Congress
Mario Draghi told bankers Friday the E.C.B. could greatly expand the breadth and pace of its asset purchases if it needs to. Photograph by Martin Leissl — Bloomberg via Getty Images

Asian and European stock and bond markets marched higher again Monday on hopes that central banks in both China and the Eurozone would add more stimulus to their respective economies.

By lunchtime in Europe, the German DAX index was up 0.8% and the French CAC 40 up 0.9%, while China’s stock markets had finished up nearly 2% earlier on hopes of relief for the country’s strained financial and real estate sectors.

Markets across Asia were lifted by the belated effects of last week’s surprise rate cut by the People’s Bank of China, which was announced after the close of local trading Friday.

The move was taken as the strongest signal yet that the authorities are concerned about the economy’s slowdown and possible tensions in the banking sector caused by souring loans. Over the weekend, Reuters cited people familiar with official thinking as saying that monetary policy could be loosened even further before very long.

“Top leaders have changed their views,” Reuters cited a senior economist at a government think-tank as saying.

In Europe, meanwhile, markets opened higher on reinforced expectations of action from the European Central Bank after an aggressively ‘doveish’ speech by President Mario Draghi on Friday.

Analysts at Credit Suisse said in a note to clients Monday that they now expect the E.C.B. to announce a full-blown program of government bond purchases–akin to the Federal Reserve’s or Bank of Japan’s–at its meeting in two weeks’ time.

“Draghi’s speech last Friday marked a further important step in the direction of sovereign bond purchases,” CS said, noting that “his language was considerably more urgent.”

Eurozone government bond prices have reached all-time highs as banks anticipate the E.C.B.’s action. The average yield on all outstanding Eurozone government debt has now fallen below 1% for the first time ever–less than three years after markets were pricing in the collapse of the Eurozone and the reintroduction of national currencies in Greece, Spain and Italy.

However, the arguments for further easing got a reality check earlier, as a closely-watched index of German business confidence rose for the first time in six months. The Ifo business climate index rose to 104.0 from 103.2 in October confounding expectations for another decline. That’s the second index in a week to indicate a turnaround in the Eurozone’s biggest economy.

The two Germans on the E.C.B.’s council are both bitter opponents of sovereign bond purchases, arguing that they allow governments to put off necessary reforms. Others are also not yet convinced that such a bold step is needed. Austrian central bank head Ewald Nowotny was reported Monday as saying that the E.C.B. should wait to see the impact of its most recent actions first before rushing into new ones.

“Monetary policy always has long lags that means one should have a calm hand,” Nowotny was reported as saying.