By Patrick Graham
LONDON (Reuters) - European stock markets surged and the euro sank on Thursday after the European Central Bank surprised by cutting already ultra-low interest rates to prop up a struggling economy.
Faced with signs of further deterioration in the euro zone's prospects, the central bank cut all of its interest rates by another 10 basis points to new record lows, putting its deposit rate further into negative territory.
European stock values jumped around half a percent in response, while the euro sank as much as a cent on the day.
"It's a surprise. Euro/dollar is getting slammed. The DAX should go up from here," said Darren Courtney-Cook, head of trading at Central Markets Investment Management.
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Sources familiar with the ECB's discussions told Reuters that officials had also been looking at plans to launch an asset-backed securities (ABS) and covered bond purchase programme worth up to 500 billion euros. The first such purchases, if approved, could be made this year.
Nothing on the asset purchase programme was announced with the bank's regular policy statement on interest rates at 1145 GMT. President Mario Draghi gives his regular and more detailed update on the bank's outlook starting at 1230 GMT.
"If it turned out to be true, the market would be delighted to see the ECB move in the direction of ABS purchases," Chris Beauchamp, a strategist at IG, said.
European share markets, after falling in early deals, were up across the board. Spanish, French and Portuguese stocks all gained almost a full percentage point, while Germany's DAX rose 0.3 percent.
That pushed the blue chip FTSEurofirst index up 0.7 percent on the day.
The euro, already suffering from expectations of more policy loosening by the ECB, fell to a session low of $1.3036.
U.S. JOBS
A month-long march higher for European and Asian stock markets had stalled earlier in the day on concerns the bank would do nothing immediate at the September meeting to address a deteriorating economic outlook.
With economies across Europe sputtering, that shares are near their highest levels since the 2007-8 financial crisis is chiefly a reflection of the billions in stimulus pumped into the financial system by central banks over the past five years.
The U.S. Federal Reserve is on the verge of halting its own programme of bond-buying, encouraged by a steady stream of reasonably encouraging signs on jobs and growth on the other side of the Atlantic.
But the jury is still very much out on when it can raise interest rates although the ADP jobs report later on Thursday, followed by nonfarm payrolls on Friday, should advance the argument.
Swiss asset managers Pictet raised their position on European equities to "neutral" in a move emailed to clients before the ECB move, also cutting their US stock weighting.
"European stocks have been upgraded as liquidity conditions are improving and positioning has turned lighter as investors have shunned the asset class for the past few months," said Luca Paolini, chief strategist at Pictet Asset Management.
"Valuations look less extended."
(Editing by Catherine Evans)
