June 19, 2019 / 7:32 AM / a year ago

European shares back to earth after Draghi bombshell

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June 19 (Reuters) - European stock markets were flat on Wednesday after posting their best results in five months a day earlier thanks to a strong policy speech from European Central Bank chief Mario Draghi that flagged a potential return to bond-buying and lower interest rates.

Draghi's speech sank the euro and drove major euro zone bond yields back below zero, slashing effective market borrowing costs, giving a boost to companies worried by sagging growth and driving the pan-European STOXX 600 index almost 2% higher.

It was flat compared to Tuesday's close by 0709 GMT, although interest rate sensitive banking stocks outperformed with a 0.7% rise.

Clydesdale and Yorkshire Banking Group bucked that trend to gain 2.8% after the British lender pledged to make an additional 50 million pounds ($62.75 million) in savings from its takeover of rival Virgin Money.

Also keeping markets afloat was news that China and the United States are rekindling trade talks ahead of a meeting next week between Presidents Donald Trump and Xi Jinping at the G-20 summit in Japan, sparking hopes that the tensions between the two sides would abate.

Draghi's speech has also further upped the stakes for a Federal Reserve policy meeting that will be Wednesday's main market event, already expected to point the way to interest rate cuts for the second half of this year. (Reporting by Amy Caren Daniel and Medha Singh in Bengaluru; editing by Patrick Graham)

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