ECB rate cut lifts stocks but euro slumps on Draghi

NEW YORK Thu May 2, 2013 4:21pm EDT

1 of 4. A man walks through the lobby of the London Stock Exchange August 5, 2011.

Credit: Reuters/Suzanne Plunkett

NEW YORK (Reuters) - Global equity markets rallied but the euro slumped against the dollar on Thursday after the European Central Bank cut interest rates to an all-time low and its president suggested the possibility of negative deposit rates in the future.

The ECB, as expected, lowered its main rate by a quarter percentage point to 0.50 percent, its first cut in 10 months. But the euro fell after Mario Draghi, the bank's president, said the ECB is "technically ready" for negative deposit rates.

Draghi departed from his previous statements when he said the ECB could cope with the consequences of cutting its deposit rate below the current zero percent. Such a move would effectively charge banks to hold their money overnight, in a bid to encourage them to lend money and support the recession-weary euro zone.

The world's biggest central banks, including the Federal Reserve and the Bank of Japan, are trying to encourage economic growth through bond-buying programs that have pushed interest rates to historic lows and encouraged equities investors.

The benchmark S&P 500 index eked out another record closing high, two one-hundredths of a points above Tuesday's record close.

A drop in new claims for jobless benefits to a five-year low spurred optimism on the U.S. labor market, while shares rebounded in Europe on the ECB's moves to bolster growth after early declines.

The euro slid as low as $1.3038, according to Reuters data, and was last at $1.3062, down 0.87 percent on the day.

"You've got the Fed still in stimulus mode and Japan surprising markets with the size of their latest stimulus package. Now you have the ECB cutting rates," said Todd Salamone, director of research at Schaeffer's Investment Research in Cincinnati.

"It all adds to the theme that global central banks are in a stimulus mode and that is positive for equities," he said.

The Dow Jones industrial average .DJI closed up 130.63 points, or 0.89 percent, at 14,831.58. The Standard & Poor's 500 Index .SPX gained 14.89 points, or 0.94 percent, at 1,597.59. The Nasdaq Composite Index .IXIC rose 41.49 points, or 1.26 percent, at 3,340.62.

The number of Americans filing new claims for jobless benefits fell sharply last week to the lowest level since the early days of the 2007-09 recession, suggesting the job market is healing even while the economy remains weak.

"U.S. markets are very focused on jobs, and the claims report suggests the positive trend of hiring could be continuing," said Weyman Gong, chief investment strategist at Signature in Norfolk, Virginia.

The data on unemployment claims comes a day ahead of the Labor Department's closely watched monthly report on the jobs market.

Other data showed a narrowing of the U.S. trade deficit in March, although drops in imports and exports provided a warning about the strength of domestic and foreign demand.

Leading European shares, as measured by the FTSEurofirst 300 index .FTEU3, clawed back into positive territory after having spent most of the morning in the red. The index rose 0.42 percent to close at 1,206.53, near its intraday high this year of 1,209.09 reached on Tuesday.

MSCI's all-country world equity index .MIWD00000PUS also reversed losses to rise 0.18 percent to 367.90.

German Bund futures set record highs and two-year yields turned negative after the ECB left the door open for further monetary easing.

Bund futures rallied more than 50 basis points to a record high of 147.20, settling at 147.16, and German borrowing costs fell as investors priced in more monetary easing down the line.

U.S. Treasuries prices traded near break-even despite the lower jobless claims, with the benchmark 10-year note up 1/32 in price to yield 1.6289 percent.

Oil climbed nearly $3 to over $102 a barrel as the ECB rate cut bolstered riskier assets.

Brent crude settled $2.90 a barrel higher at $102.85. U.S. crude rose $2.96 to settle at $93.99.

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GRAPHICS

U.S. jobless claims: link.reuters.com/xew34t

ECB rates link.reuters.com/juw29s

Euro zone liquidity link.reuters.com/qeq25s

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(Additional reporting by Marc Jones in London; Editing by Kenneth Barry, Dan Grebler and Leslie Adler)