Europe close: Banks lead rally as investors digest ECB policy moves

The benchmark DJ Stoxx Europe 600 index was up 2.62% by the close, Germany’s DAX was 3.51% higher and France’s CAC 40 was 3.27% firmer.

Banks were the standout gainers, with the Stoxx 600 index for the sector up 4.84% at 159.56, just a tad below the previous session's intra-day highs.

“Overall perhaps the eventual negative market reaction was due to the increasing realisation that this meeting might mark the point where focus shifts from easing being solely for the financial markets to one where it's aimed at improving credit in the economy.

“By association this may explain the significant rally in the Euro as markets feel that the game of trying to weaken the currency is shifting,” Deutsche Bank’s Jim Reid said to clients in a research note.

To take note of, on Friday ECB vice president Vitor Constancio took the unsual step of defending the monetary authority's policies in an article posted to the central bank's website. In his opinion, monetary policy was just about the only lever left to authorities if they wanted to buoy economic activity and inflation over the next two years.

Longer-term sovereign bond yields in the euro area periphery were also moving lower, as one might have expected after the ECB's announcement, although euro/dollar was little changed, drifting lower by just 0.01% to 1.1175 by the close of trading.

At the same time, West Texas Intermediate was up 2.02% to $38.62 a barrel and Brent crude was 0.79% stronger at $40.37. The Stoxx 600 oil and gas index advanced 2.56%.

The International Energy Agency said in its monthly report there are signs oil prices “might have bottomed out” and there is now “light at the end of what has been a long dark tunnel”.

On Thursday, the European Central Bank slashed its main interest rate by 5 basis points to 0.00% and increased quantitative easing by €20bn to €80bn from April. Market participants had been expecting a €10bn increase.

In addition, the central bank cut the deposit facility rate by 10bps to -0.40% and lowered the margin lending facility rate to 0.25% from 0.30%.

Stocks flew higher on the news but soon reversed course as ECB chief Mario Draghi said in the press conference that policymakers were concerned that pushing rates too low could impact balance sheets, pouring cold water over prospects for further rate cuts.

“After initially surging on yesterday's ECB headlines they subsequently sold off hard on Draghi's 'no more rate cuts' comment (how very short-sighted),” said Mike van Dulken, head of research at Accendo Markets.

“They have since recovered after realising that Super Mario still delivered more than markets were anticipating (more QE, wider QE, more rate cuts, attractive LTROs) and, more importantly, is a man of his word, prepared to do 'whatever it takes'. So we may well be trading down for the week, but we are well off the lows (in some cases back just shy of highs) and with some bold central bank action safely banked.”

In corporate news, Deutsche Bank was on the front foot despite warning that of a challenging first quarter.

London-listed pub chain JD Wetherspoon was also in the black after reporting a 6.2% increase in first half revenues but a drop in profit.

On the downside, Old Mutual slid after the financial services company said it was splitting up into four main businesses and posted a 5% increase in 2015 profit.