UK & Europe
European stocks sharply reversed early gains to end significantly lower on Thursday with the German DAX making fresh two week lows below 10,760. UK stocks outperformed those on the continent but the FTSE 100 still finished lower, having touched the lowest in over a week.
The European Central Bank and its president Mario Draghi loosened monetary policy but did so in a manner that under-delivered on almost every front. Every metric of the ECB’s easing was less than expected by markets. The ECB cut the deposit rateby the minimum amount expected, extended the length of QE program by six months when the market was looking for 12 months and expanded the pool of assets available for purchase without increasing the size of monthly purchases.
Clearly with the Euro-area recovery ticking along, consumer prices popping back out of deflation and the Fed set to raise rates this month, the ECB decided to row back on the extent of additional stimulus. Given the limited depth of European sovereign bond markets, the ECB probably felt it had to expand the pool of assets its buying to include local government debt. A bigger pool of assets is probably needed just so the ECB can extend the QE program without running out of things to buy or cornering the bond market.
Parliament voting to extend UK airstrikes in the Middle East to Syria has not borne out any major reaction in financial markets with stocks higher, the British pound slightly lower and bond yields unchanged.
There was broad-based selling on the FTSE 100 with every sector in the red following the under-delivery of stimulus from the ECB. Consumer services stocks were top performers on the UK benchmark after a broker upgrade to Costa coffee-owner Whitbread (L:WTB) ahead of a trading update next week.
US
US stocks opened lower in line with European markets. US stocks are indirect beneficiaries of European asset purchases so the negative impact of Mario Draghi’s under-delivery has not been so great. For the most part investors have taken well to the idea of the normalisation of US interest rates at a slow pace as advised by Janet Yellen in her testimony on the economic outlook.
FX
The euro experienced a huge spike in volatility on Thursday with a daily range of close to 400pts, having initially dropped to new lows before rallying over 1.09. The ECB eased policy but went a bit overboard on jawboning the euro beforehand. This increased the risk of short-covering on even a slight under-delivery. The way the euro had been trading into the interest rate announcement, it was as if the market was pricing in a dovish surprise. As it turned out, the ECB under-delivered on every metric and caused a bullish key day reversal in EUR/USD and EUR/GBP. The huge rally off multi-year lows in the euro-sterling currency cross increases the odds we have seen a long term bottom being put in.
The dollar flopped against major European currencies following the ECB policy easing decision but held its own against Asian currencies including the Japanese yen and Australian dollar which were flat.
Commodities
The price of Oil has rebounded from five-year lows after a report indicated Saudi Arabia said it would back output cuts if they were supported by non-OPEC countries. The Saudi’s slight concession makes a cut at Friday’s meeting very unlikely since Russia, the biggest non-OPEC oil producer is not yet on board, but does raise the possibility of it happening next year.
Gold and Silver were slightly higher thanks to weakness in the US dollar, though initial gains after the ECB disappointment were quickly given up. The ECB by its failure to meet dovish expectations has actually increased the ability of the Fed to raise rates in December by softening the US dollar.
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