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While you were sleeping: Stocks drop, euro gains

Friday 3rd October 2014

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European stocks dropped, while the euro strengthened, as the European Central Bank disappointed investors with a lack of details about its asset purchase plan aimed at kickstarting the euro-zone’s flagging economy.

ECB President Mario Draghi said the central bank will buy assets for at least two years, starting covered-bonds purchases this month and asset-backed securities this quarter. The ECB kept its main refinancing rate at 0.05 percent.

“The risks surrounding the economic outlook for the euro area remain on the downside,” Draghi said in a statement. “In particular, the recent weakening in the euro area’s growth momentum, alongside heightened geopolitical risks, could dampen confidence and, in particular, private investment.”

Investors were unimpressed.

“Investors had hoped that the ECB would step-up stimulus plans after the recent weakness in both growth and inflation data, either by announcing a very large amount of purchases, or the addition of sovereign-debt purchases,” Azad Zangana, European economist at Schroder Investment Management in London, told Bloomberg News. “The problem the ECB faces is that the pool of assets being targeted is too small to make a major impact on the economy.”

Europe’s Stoxx 600 ended the day with a 2.4 percent slide from the previous close. Germany’s DAX dropped 2 percent, while France’s CAC 40 sank 2.8 percent.

Italy’s FTSE MIB Index plunged 3.9 percent, Portugal’s PSI 20 Index slumped 3.3 percent, while Spain’s IBEX 35 Index gave up 3.1 percent. The UK’s FTSE 100 Index fell 1.7 percent

The euro strengthened, climbing as much as 0.6 percent against the greenback. It recently traded at US$1.2675.

"The euro rose not because of what Draghi said, but what he didn't say," Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, told Reuters. "We haven't heard any meaningful language regarding an increase in the scope of assets to be purchased, in other words, outright quantitative easing."

Wall Street recovered from losses earlier in the day. In late afternoon trading in New York, the Dow Jones Industrial Average gained 0.03 percent, the Standard & Poor’s 500 Index rose 0.09 percent, while the Nasdaq Composite Index advanced 0.29 percent.

The Dow moved higher as gains in shares of Home Depot and those of Goldman Sachs, up 1.4 percent and 1.1 percent respectively, outweighed declines in shares of JPMorgan and those of Intel, down 1.3 percent and 1.1 percent respectively.

A Labor Department report showed that initial claims for state unemployment benefits unexpectedly declined 8,000 to a seasonally adjusted 287,000 in the week ended September 27.

Evidence of ongoing improvement in the US labour market weighed on US Treasuries, pushing the benchmark 10-year yield three basis points higher to 2.41 percent. Even so, the recent weakness in equity markets might help push yields lower.

“With stocks slipping in Europe and not looking very favourable in the US, that’s very telling about what Draghi had to say,” Thomas di Galoma, head of fixed income rates at ED&F Man Capital Markets in New York, told Bloomberg News. “We’re probably headed toward the 2.30 percent level” on 10-year notes.


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