European stocks close higher as Greek austerity deal agreed and BoE increases size of QE2

European stock markets climbed between 0.3% and 0.5% on Thursday after Greece political leaders agreed on the crucial austerity plans dictated by the Troika (ECB, EU and IMF) as part of the second bailout package. The Bank of England increased asset purchases by £50bn whilst the ECB kept interest rates on hold at 1%, both as expected.

The FTSE 100 closed at 5892, a rally of just 16 points and remains firmly locked in a period of consolidation as investors await clear signals to help increase appetite for risk.

The uncertainty over the Greece bailout situation is seemingly close to an end now with Greek leaders agreeing austerity terms, a decision that convinced the Deputy Labour Minister to resign in acrimonious style. A statement out of the Greek PM’s office in afternoon trading confirmed that an agreement had been reached, and this gave stocks an immediate lift. But with EU finance ministers meeting this afternoon to discuss the bailout package and confirming that no decision would be reached today, there does remain some degree of apprehension. The Greek Parliament will still need to pass the terms and rhetoric from German Finance Minister Schaeuble that he is ‘still not clear that the Greek deal can reduce debt to 120% of GDP by 2020.’ This does not instil optimism that the Troika has complete confidence that Greece can stick to its end of the bailout terms.

The reaction from the Bank of England decision to increase asset purchases by £50bn as part of QE2 was rather muted considering this had long been priced into the market. The bigger risk laid in a scenario whereby the BoE failed to meet expectations with a rise of just £25bn or even none at all. Fortunately, this was not forthcoming, and so as such, stocks were left barely changed in the reaction to the BoE decision, which also saw interest rates being kept on hold for yet another consecutive month.

The ECB also kept rates on hold at 1%, as expected and in the press conference following the decision with President Mario Draghi, the Central Bank outlined new looser collateral rules that would give EU banks the freedom to swap a wider range of the traditional style loans they give to businesses and consumers for ECB funding. Draghi said, ‘Yes we are taking on more risks, but this does not mean these risks won’t be managed.’

From a sector perspective it was gains in energy firms leading the charge higher, and this was mostly led by a rally of 3.15% in the shares of BG Group after reporting stronger than expected earnings.

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