Euro left reeling after ECB’s liquidity splurge
London (Sept 5) The euro was deep in the red on Friday, having suffered its steepest fall in three years after the European Central Bank (ECB) stunned markets by cutting interest rates and embarking on a trillion-euro asset-buying binge.
The aggressive shift sent short-term bond yields into negative territory in Germany, France, the Netherlands and Austria, giving investors an overwhelming incentive to sell euros for higher-yielding assets elsewhere.
That stood in stark contrast to the US, where upbeat data only reinforced the case for the Federal Reserve to wind down its stimulus, driving the dollar higher and sideswiping oil and gold in the process.
After surging to a six-and-a-half-month high on Thursday, European share markets saw some minor profit taking as the US payrolls report loomed large later in the session. London’s FTSE 100, the DAX in Frankfurt and CAC 40 in Paris were all about 0.1%-0.2% lower but this week’s gains — the fourth in a row — took the pan-regional FTSEurofirst 300 index’s rise since mid August to more than 8%.
"Ourselves along with most market participants were surprised by the degree of the action taken by the ECB yesterday," said Derek Halpenny, European head of Global Markets Research at Bank of Tokyo-Mitsubishi UFJ.
"We believe euro depreciation is what the ECB is focused on for alleviating the near-term downside inflation risks that have become apparent of late," he added, also saying the bank would cut its end of year forecast for the euro.
The currency itself was licking its wounds at $1.2934, after hitting a 14-month low of $1.2920 overnight, and it seemed destined to test the July 2013 trough of $1.2898. It hit a one-month low on the yen at ¥135.97, while the dollar briefly spiked to a six-year peak of ¥105.71 before steadying at ¥105.35.
The single currency’s capitulation came after ECB president Mario Draghi announced a range of rate cuts and a new plan to push money into the flagging eurozone economy.
In a news conference, Mr Draghi said the aim was to expand the bank’s balance sheet back to the heights reached in early 2012, which equates to a rise of about 50% or 1-trillion euros in new assets.
Peripheral vision
Markets were also eyeing whether or not the US and Europe pushed ahead with plans for new sanctions on Russia at a Nato meeting in Wales.
Ukrainian President Petro Poroshenko and the main pro-Russian rebel leader said they would both order ceasefires on Friday, provided that an agreement is signed on a new peace plan to end the five-month war in Ukraine’s east.
In Asia, Japan’s Topix stalled just short of its January peak. Chart resistance is tough as a break there would take it to levels last seen in July 2008.
Chinese stocks, extended their bull run, however, with the CSI300 of the leading Shanghai and Shenzhen A-share listings barrelling to their best in more than eight months.
Shorter-dated eurozone debt continued to gain. They rallied hard after the ECB move, pushing the yield gap between US and German two-year debt out to 60 basis points, the fattest premium since May 2007.
Spanish and Italian 10-year yields fell four basis points to 2.13% and 2.33%, respectively, within touching distance of their record lows and just more than one percentage point above German bund yields.
"The main beneficiaries are the peripheral markets and I still think there is scope for spreads to narrow over bunds, particularly in Spain," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
Positive payrolls
Across the Atlantic, data provided fresh evidence that the US economy was on track for sturdy growth in the third quarter. Companies hired workers at a steady clip in August and service-sector activity accelerated to a six-and-a-half-year high.
That lifted yields on 10-year Treasuries by four basis points to 2.453%, further supporting the dollar.
Investors are now keenly waiting for the latest read on the US labour market due later on Friday. Analysts expect the pace of job creation to have picked up slightly in August, with a rise of 225,000 jobs on non-farm payrolls.
With the US dollar flying, commodities had to cheapen to stay attractive and gold struck a three-month low at $1,256.90 an ounce before clambering back to $1,265.
Brent crude oil was off 4c at $101.79 a barrel after shedding more than a dollar overnight, while US crude edged up to $94.71. It was set to be a third weekly drop for oil.
Source: bdLive.za
