Wellington- The S&P/NZX 50 Index dropped 17.64 points, or 0.29 per cent, to 6125.67. The selling pushed the S&P 500 back into the red for 2015.
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The ECB’s stimulus plans, long awaited, came in with a thud Thursday.
While more modest than many were expecting, Thursday’s rate cut leaves the two most powerful central banks in the world moving in opposite directions.
The drama started after the European Central Bank cut its deposit rate deeper into negative territory and extended its asset buying by six months.
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.
Europe’s economy has lagged behind the United States since the financial crisis, and policymakers have struggled to keep the 19 countries that use the euro from falling into deflation or an economic contraction. If the economic fundamentals and inflation improve, the European Central Bank still wins, but if those fundamentals don’t improve sufficiently quickly, there is now a bigger risk that long-term inflation expectations would slip again. Thursday’s decision disappointed euro bears who increased bets last month after ECB President Mario Draghi promised to “do what we must” to spur lackluster inflation.
Cash from expired bonds will also be re-invested into the programme.
European stocks also had one of their worst days in months. Germany’s DAX was down a whopping 3% while the CAC-40 in France slid 2.6%. Greater stimulus would have put downward pressure on interest rates. The yield on the 10-year French government bond rose 0.20 percentage points to 0.99 per cent, also a substantial move.
The 10-year bund yield, which jumped by the most since 2011 after the ECB’s meeting, was little changed on Friday and set for its biggest weekly advance since June.
A bigger-than-expected package might send the euro south against the dollar, while a disappointment might cause it to strengthen.
The yield on 10-year Italian bonds dropped one basis point to 1.63 percent while the Spanish bond yield increased one basis point to 1.74 percent.
On Wall Street, after initially opening higher, U.S. stocks were mixed, some picking up the gloom of investors in Europe.
The ECB lowered its so-called deposit rate to minus 0.2 percent in September 2014 and has now cut it further to minus 0.3 percent. In comments Wednesday, Fed Chair Janet Yellen gave an upbeat assessment of the economy’s progress since the Fed’s last meeting in October, describing it as in line with its expectations for the labor market and inflation.
Traders added that expectations of a USA interest rate rise this month were also making investors wary of buying into the stock market for now.
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Economists forecast that USA employers created 200,000 jobs in November, and the unemployment rate remained steady at 5 percent. Critics of easing, led by the Governing Council’s two German members, argue that monetary policy is already exceptionally loose and the biggest reason inflation is hovering near zero is the fall in oil prices, which is a boost for growth as lower energy costs leave households with more to spend.
