While you were sleeping Draghi flags possible rate cut

Friday 9th May 2014

European stocks climbed while the euro slid against the US dollar as European Central Bank President Mario Draghi signalled a potential interest rate cut next month.

The ECB kept, as had been anticipated, its key interest rate steady at a record low 0.25 percent but suggested it might lower it in June if needed.

"The governing council is comfortable with acting next time but before we want to see the staff projections that will come out in early June," Draghi said after the central bank's policy meeting.

Europe's Stoxx 600 Index finished the session with a gain of 1.1 percent from the previous close. The UK's FTSE 100 rose 0.6 percent, Germany's DAX added 0.9 percent, while France's CAC 40 jumped 1.4 percent.

"They signalled through the press conference that a rate cut is likely in June," Martin Schwerdtfeger, a foreign exchange strategist at TD Securities in Toronto, told Reuters.

The euro slid 0.4 percent against the greenback, after rising as high as US$1.3993 earlier in the session, the highest level in 2-1/2 years.

"Draghi's guidance was the key takeaway from today's press conference," Robert Lynch, a currency strategist at HSBC Holdings in New York, told Bloomberg News. "The more overt signal of the potential -- if not the outright intention -- to ease policy next month has already worked to drive euro-dollar down after the pair nearly eclipsed the US$1.40 threshold."

Draghi's comments also bolstered the appeal of bonds in the euro zone, pushing yields lower.

Across the Atlantic, equities seesawed through the day. With about an hour of trading left in the day in New York, the Dow Jones Industrial Average rose 0.29 percent. The Standard & Poor's 500 Index was down 0.01 percent, while the Nasdaq Composite Index slipped 0.07 percent.

An early rally in some of the momentum technology stocks faded as the day unfolded.

In testimony to a US Senate panel, Federal Reserve Chair Janet Yellen said it might take five to eight years for the Fed to unwind its monthly bond purchases. The central bank's balance sheet has widened to more than US$4 trillion from about US$800 billion in 2007.

"We've not decided, and we'll probably wait until we're in the process of normalising policy to decide, just what our long-run balance sheet will be," Yellen said, adding it will be "substantially lower" than it is now, Reuters reported.

"If we do that [stop re-investing funds from expired assets] and nothing more, it would probably take somewhere in the neighbourhood of five to eight years to get it back to pre-crisis levels," according to Yellen.

Gains in shares of AT&T and Walt Disney, last up 1.9 percent and 1.5 percent respectively, outweighed declines in shares of Merck and UnitedHealth, last down 1.4 percent and 1.2 percent, to keep the Dow in the green.

The latest data showed initial claims for state unemployment benefits fell 26,000 to a seasonally adjusted 319,000 for the week ended May 3.

BusinessDesk.co.nz

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