While you were sleeping ECB surprises with rate cut

Friday 8th November 2013

Equities on both sides of the Atlantic fell, and bond prices rose, after a surprise interest rate cut by the European Central Bank underpinned the struggle of the euro zone economies to recover.

The euro slumped, sliding as much as 1.6 percent against the greenback, after the ECB slashed its benchmark interest rate to a record-low 0.25 percent in an effort to bolster growth.

"The risks surrounding the economic outlook for the euro area continue to be on the downside," ECB President Mario Draghi said in a statement.

"Developments in global money and financial market conditions and related uncertainties may have the potential to negatively affect economic conditions. Other downside risks include higher commodity prices, weaker than expected domestic demand and export growth, and slow or insufficient implementation of structural reforms in euro area countries," he said.

Draghi signalled he is ready to do more if needed.

"We may experience a prolonged period of low inflation," Draghi said. "Accordingly, our monetary policy stance will remain accommodative for as long as necessary. It will thereby also continue to assist the gradual economic recovery as reflected in confidence indicators up to October."

In Europe, the Stoxx 600 Index ended the session almost 0.1 percent lower than the previous close. France's CAC 40 fell 0.1 percent, while the UK's FTSE 100 dropped 0.7 percent. Germany's DAX rose 0.4 percent.

"The euro region is likely to get stuck in a low-growth, low-inflation environment for a while," Harvinder Sian, a fixed-income strategist at Royal Bank of Scotland Group in London, told Bloomberg News. "For the ECB's easing bias to have any meaningful credibility at all, it has to act. And it did."

In afternoon trading in New York, the Dow Jones Industrial Average fell 0.28 percent, the Standard & Poor's 500 Index shed 0.4 percent, while the Nasdaq Composite Index slid 0.9 percent.

The latest US data showed better-than-expected headline growth, though it was driven by a build-up in inventories. The US economy posted a 2.8 percent annualised increase in the third quarter, exceeding both estimates for a 2 percent pace and the 2.5 percent gain in the prior three months.

"Should demand accelerate heading into year end, businesses should be better-positioned to meet that demand," Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan, told Reuters. "However, in the absence of a surge, future production may need to be trimmed to bring inventories back in line."

Separately, Labor Department data showed that initial claims for state unemployment benefits declined by 9,000 to a seasonally adjusted 336,000 last week.

Tomorrow's government report is expected to show that US employers added 120,000 workers in October, while the jobless rate climbed to 7.3 percent.

Earnings from Whole Foods and Qualcomm disappointed, sending their stocks down 9 percent and 4.7 percent respectively.

But there was good news too as shares of Twitter made a shining debut. The stock soared, last up 77.5 percent to US$46.15, in their first day of trading.

"It's definitely a hot IPO, and it's doing what it should be doing" Dan Veru, chief investment officer at Palisade Capital Management, told Reuters. "It seems like they have averted any issues that happened with Facebook."

BusinessDesk.co.nz

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