Stocks fall after Draghi fails to convince investors that ECB will step up bond purchases

European stocks fell sharply after the ECB cut rates by 25 basis points, as expected, but investors were left disappointed by Mario Draghi’s failure to confirm that the ECB could step up bond purchases to contain the sovereign debt crisis.

It has been a very choppy trading session today, with investors mostly sitting on the sidelines and waiting to see which way the wind blows in terms of progression at the EU Summit. What money is at play right now is being diversified, with investors seeking to minimise risk by downsizing positions in risky banking stocks and recycling these funds into typical defensive stock sectors such as pharmaceutical firms. GlaxoSmithKline’s shares rose 1% on the day.

The ECB rate decision threw few surprises and the market had already priced in a 25 basis point cut in interest rates whilst it had also been long expected that the Central Bank would try to prop up bank liquidity with further funding operations. However, there were faint hopes that perhaps Draghi could give further hints that the ECB was prepared to aggressively step up its bond purchases to help contain the debt crisis and he failed to deliver on these hopes, which sent stocks tumbling in afternoon trade.

Whilst to be fair he was unlikely to do so today anyway considering this decision would likely be strongly correlated to any progression being made at the EU Summit, it gave investors an excuse to protect their gains after a week and a half of strong gains.

Draghi also stating his preference for ‘market stabilisation’ to come from the EFSF primarily, than just the ECB, also knocked a bit of investor optimism that the ECB could step up its bond purchases, even if the so called ‘fiscal compact’ is reached within the eurozone.

In the same breath, Draghi also highlighted the substantial risks to the downside that exist for the eurozone economy and this too left a somewhat sour taste in investors’ mouths.

The FTSE 100 fell sharply immediately after the ECB decision, losing as much as 100 points in the afternoon session, with banks and miners (two of the more risky asset sectors) taking the brunt of the selling.

Volumes were less than uninspiring too today, and this likely exacerbated the moves to the downside in the afternoon session, with most investors putting very little money at risk whilst and progress being made at the EU Summit hangs on a cliff edge.

All eyes now focus on Brussels where investors will eagerly await any news or speculation out of the region. Friday could well be a day of history in the making for the future of the eurozone and investors are likely to be on edge throughout the trading session as a result, making tradnig choppy.