While you were sleeping: ECB's Draghi disappoints

Friday 4th December 2015

Equities and bonds dropped on both sides of the Atlantic as European Central Bank President Mario Draghi offered additional easing that fell short of expectations, while Federal Reserve Chair Janet Yellen underpinned bets she’ll raise rates this month.

The European Central Bank cut its deposit rate and extended its quantitative-easing program until at least March 2017, also broadening the range of securities it can buy to debt issued by euro-zone regional and local governments, but failed to increase the total value of its monthly asset-buying program.

The ECB’s Governing Council “if warranted, is willing and able to act by using all the instruments available within its mandate in order to maintain an appropriate degree of monetary accommodation,” Draghi said in a press conference.

Europe’s Stoxx 600 Index slid, finishing the session with a plunge of 3.1 percent from the previous close. The UK’s FTSE 100 Index sank 2.3 percent, while both Germany's DAX and France’s CAC 40 Index slumped 3.6 percent.

“Draghi’s known for overdelivering,” Gennadiy Goldberg, a US rates strategist in New York for TD Securities, one of the 22 primary dealers that trade with the Fed, told Bloomberg. “That’s not the case anymore. He’s underdelivered.”

The euro jumped, climbing to its highest level against the greenback in a month.

"The (ECB) commentary clearly caught people by surprise," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles, told Reuters. “Most currency traders were short the euro and long the [US[ dollar, expecting different commentary from chairman Draghi.”

The Fed’s Yellen, meanwhile, strengthened expectations the Federal Open Market Committee will announce an interest rate increase after its next meeting on December 15 and 16.

“I currently judge that US economic growth is likely to be sufficient over the next year or two to result in further improvement in the labour market,” Yellen said in testimony to the Congress’s Joint Economic Committee on Thursday.

“Ongoing gains in the labour market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2 percent as the disinflationary effects of declines in energy and import prices wane,” according to Yellen.

A US Labor Department report showed initial claims for state unemployment benefits rose 9,000 to a seasonally adjusted 269,000 for the week ended November 28. The data followed a stronger-than-expected ADP employment report on Wednesday. On Friday, a government report is expected to show US employers added 200,000 jobs in November.

Economists surveyed by Bloomberg and investors in futures markets anticipate the target range for the benchmark federal funds rate to rise by a quarter percentage point this month.

Wall Street declined. In 12:47pm trading in New York, the Dow Jones Industrial Average dropped 0.6 percent. In 12.32pm trading, the Standard & Poor’s 500 Index shed 0.9 percent, while the Nasdaq Composite Index fell 1.1 percent.

"Markets are still struggling with the dichotomy between the ECB and the Fed," Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago, told Reuters.

Slides in shares of Merck and those of Travelers, last each trading 1.8 percent weaker,

helped drag the Dow lower. Bucking the trend were shares of Wal-Mart Stores and those of General Electric, up 1.5 percent and 0.6 percent respectively, for the only two Dow members to trade higher in the early afternoon.

US Treasuries also fell, pushing yields on 10-year note 11 basis points higher to 2.29 percent.

Treasury yields “are being driven higher by the selloff in European fixed income,” TD Securities’ Goldberg said.

BusinessDesk.co.nz

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