European Stocks Trim Best Month Since 2015 as Banks Fall on ECB

(Bloomberg) -- European equities pared the best monthly advance since 2015 after investors were disappointed by the European Central Bank’s policy update, with banks leading the slump.

The Stoxx Europe 600 Index dropped 2%. Cyclicals including banks and miners were among the worst performers, while a historic dividend cut from Royal Dutch Shell Plc also dragged down energy shares.

The ECB today maintained its pandemic emergency purchase program, while cutting the cost of funding for lenders and refraining from boosting its bond-buying plan. Despite today’s downturn, European equities gained 6.2% in April amid stimulus measures and optimism about the rate of coronavirus infections easing, paving the way for countries to lift lockdowns.

“Markets have been left disappointed by the ECB’s failure to boost bond purchases, instead hiding behind a very long press release that only announced two small adjustments, both focused on cheaper loans to banks,” said Seema Shah, chief strategist at Principal Global Investors. “Essentially, the ECB’s chosen strategy seems to be sweetening banks in order to convince them to lend into the real economy. If this is the ECB’s response to the U.S. Main Street Lending Program, markets’ disappointment may be valid.”

The ECB on Thursday urged politicians to provide more fiscal support in response to the pandemic’s impact, hours after a report showing a record gross domestic product contraction in the euro area. President Christine Lagarde warned that the economy could shrink as much as 12% this year.

Policy makers reduced the cost of their emergency loan program for banks, and unveiled a further facility to inject liquidity into the economy.

”In the eurozone’s worst recession ever, the ECB will almost certainly have to scale up its asset purchases this year,” said Florian Hense, European economist at Berenberg. “The bank had no need to do so today already.”

Banks fell the most in more than a week, with Societe Generale SA and Lloyds Banking Group Plc down more than 7% after also reporting results.

Among other notable movers, Reckitt Benckiser Group Plc climbed 3.6% after increasing its full-year outlook as exceptional demand for the company’s hygiene and health products drove its strongest start to the year in recent memory.

Investors are also carefully watching for signs of progress in managing the coronavirus. Stocks around the world surged on Wednesday after Gilead Sciences Inc. said its experimental drug helped Covid-19 patients recover faster.

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