Shares, euro rise as ECB keeps rates unchanged

The ECB said it would wait to see whether inflation and the euro zone economy slow further before deciding on any fresh cut in borrowing costs, echoing the stance of the US Federal Reserve which took a similar wait-and-see approach on Wednesday.

US Treasuries briefly edged higher after the ECB announcement and US stock index futures held onto gains, while the dollar was down 0.3% at 78.21 yen, just above a two-month low of 77.90 yen.

Also read:Full text of ECB President Draghi's speech

Investors and traders were eagerly awaiting ECB President Mario Draghi's news conference later to see if he will deliver fresh crisis-fighting measures after saying last week the central bank would do all it could to preserve the euro.

Reuters reported on Monday that the ECB was considering re-activating its Securities Markets Programme (SMP) to buy Spanish bonds in tandem with the euro zone's rescue funds, but that action could be at least five weeks away.

"If we're right in thinking that the bond purchases are probably not coming today, then to cushion the blow Mr Draghi will need to make clear that he meant what he said a week ago," Ken Wattret, chief euro-area economist at BNP Paribas said.

The euro rose 0.5% to a day's high of USD 1.2304 on the ECB decision to be well clear of last week's two-year low of USD1.2042.

RAISED HOPES

Spain had to pay higher yields than a month ago on its 10-year bonds at an auction on Thursday, but it easily sold 3.1 billion euros of debt with yields far lower than indicated last week before Draghi's announcement that he would do whatever it takes to save the euro.

Spanish 10-year paper sold at an average yield of 6.647% - a rate analysts say is still close to unsustainable but nearly a full percentage point cheaper than the 7.639 yield hit on July 24 in secondary trading.

"We still see risks for the Spanish debt near term as risks of disappointment after today's ECB meeting remain high," said market economist Annalisa Piazza of Newedge Strategy.

The premium investors demand to hold Spanish over safer German government bonds eased after the auction as the government was able to sell a bit more paper than expected, but was still very high at 531 basis points.

Ten-year Spanish bond yields barely changed after the ECB enouncement to be down 5 basis points at 6.69%, while equivalent Italian yields were 11 basis points lower on the day at 5.82%.

Since Draghi surprised markets last week with a promise to save the euro, European shares have rallied by up to 5%, the euro has risen about a cent against the dollar, and yields on Italian and Spanish debt had fallen sharply, increasing the risk of disappointment from today's news conference by Draghi.

The FTSEurofirst 300 index of top European stocks was up about 0.6% at 1,074.99 points after rising as high as 1,076.02 earlier in the day for a second day of gains after a sharp selloff on Monday.

The MSCI world equity index managed a slight gain of 0.2% to 316.14 points after US and Asian stocks had earlier fallen in the wake of the Fed's decision not to announce any new monetary stimulus at the end of its two-day policy meeting.

The Fed did leave open the door to action if economic conditions worsened, but policymakers are not scheduled to meet again until mid-September.

Brent crude oil rose to nearly USD 107 a barrel after the ECB decision, while US crude inched up 30 cents to USD 89.20.