The euro has reacted positively to the raft of measures that were released by the European Central Bank (ECB) yesterday.
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Petroleum-linked equities fell, including Dow members ExxonMobil and Chevron, which lost 1.4 per cent and 1.6 per cent, respectively. Once they realised Draghi’s policies were fairly mild, they began frantically buying back euros to cover their short sells, sending the price up instead.
The ECB introduced on Thursday, by a significant majority, a new twist to its stimulus programme.
MARKET INSIGHT: “Mr. Draghi took out his bazooka yesterday and fired it into his own foot”, said Michael Every, head of Asia-Pacific financial market research at Rabobank. Expectations had been elevated after ECB chief Mario Draghi signaled the bank would act decisively to keep the 19 countries that use the euro from falling into deflation or an economic contraction. The ECB will cut a key interest rate less than expected and it won’t increase its monthly bond purchases.
“Looking at the ECB’s macro assessment, it looks as if nearly unchanged growth and inflation forecasts, as well as a positive assessment of the impact from QE up to now, laid the grounds for the ECB’s rather reserved policy reaction”. Market hopes had been stoked by Draghi himself and other dovish board members.
The news sent the euro surging on Thursday to a one-month peak at $1.0981, having earlier hit a 7.5-month low of $1.0524 in highly volatile deals. Despite the bold announcement, markets were disappointed by the size of the stimulus, hammering US and European stocks and driving up the euro against the dollar, according to The Wall Street Journal.
On Friday morning in Europe, London shed 0.4 percent, Frankfurt slid 0.2 percent and Paris lost 0.3 percent. They are also wondering why the European Central Bank failed to counter the markets’ pricing of a more aggressive programme in the weeks before Thursday’s let-down. “They did indeed have higher expectations than were there and that’s why they reacted like they reacted but that was not our intention”. The yield on the 10-year German government bond soared 0.20 percentage points to 0.67 percent, a massive move in the bond market. This makes today’s U.S. NFP report even more important.
United States markets overnight were no better, ahead of today’s market-moving non-farm payrolls data for November and after Federal Reserve chair Janet Yellen again indicated that a rate hike is on the cards this month.
US stocks appear ready to rise Friday after data showed non-farm payrolls rose by 211,000 with the unemployment steady at 5%.
In commodities, oil prices which have been under pressure in recent times following surplus production, rebounded with WTI crude oil trading 0.41% higher at $41.25 a barrel and Brent trading up 0.14% at $43.90 a barrel.
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Indeed, business activity in the euro zone picked up at its fastest pace since mid-2011 last month, third quarter economic growth was running at a respectable 1.6 per cent and lending is increasing at the quickest rate in four years.
