Europe Roars Approval As Ecb Pulls Out The Bazooka
The euro slumped and shares and bonds rallied on Thursday as traders cheered aggressive stimulus measures by the European Central Bank which cut its main interest rate to zero and souped up its QE program to include corporate bonds.
Markets had been wondering what Mario Draghi had left up his sleeve but any doubts were dispelled as the ECB also took it its deposit rate down to -0.4 percent and launched another round of what will be zero-interest lending operations.
The move to start buying non-financial sector corporate debt will help add another 20 billion euros a month to its already massive asset-purchase program.
“This was a much bigger bazooka than the market was expecting and shows the ECB trying to get ahead of the confidence curve after learning its lesson,” Saxo Bank’s head of FX strategy John Hardy said.
The euro sank a full cent against the dollar to a one-week low of $1.0863 per dollar from around $1.0970 before the announcement EUR=. It also fell by more than half a percent against the Swiss franc, yen and sterling. EURCHF= EURJPY= EURGBP=
German Bunds rallied, with futures FGBLc1 hitting the day’s highs at 163.00 and 10-year yields DE10YT=TWEB down 5 basis points to 0.19 percent.
Shares surged too, with the FTSEurofirst 300 index .FTEU3 jumping 2.5 percent to add to the 13 percent it has gained over the last month. The euro zone blue-chip index .STOXX50E soared 3.6 percent, with banking stocks among the strongest gainers.
U.S. futures pointed to solid gains for Wall Street when it resumes. Weekly jobless claims will be the day’s main U.S. data.
All eyes were firmly on Frankfurt and Mario Draghi’s 1330 GMT news conference, at which he will explain the rationale for the ECB’s shock and awe tactics.
A Reuters poll beforehand had shown economists expecting only another 10 billion euros a month would be added to its 1.5 trillion euro bond-buying program and none had expected the bank’s main refinancing rate to go to zero.
The ECB will also release new economic staff forecasts at the news conference which are likely to show inflation this year at zero or even negative, something it has never before predicted for any year.
Oil prices, the sharp fall in which over the last 1-1/2 years has been one the key drivers for the slump in inflation, were steady in early European trading, with benchmark Brent futures LCOc1 holding at just over $40 a barrel.
The big surprise in Asia overnight came from New Zealand’s central bank, which pre-empted the ECB by cutting its main interest rate to a record low 2.25 percent.
The Kiwi dollar tumbled NZD=D4 to $0.6618 and Reserve Bank of New Zealand Governor Graeme Wheeler cited China as a major risk, reflecting global concerns over a slowdown in the world’s second-biggest economy.
“If China had a very significant and prolonged devaluation, it would in essence spread deflation around the world,” Wheeler told reporters, adding that China was building up a number of serious imbalances.
Asian stocks edged up meanwhile, encouraged by the previous day’s rally in crude prices and expectations that an aggressive showing from the ECB later could see dovish reactions from the Bank of Japan, Fed, Swiss National Bank and Bank of England which all meet over the next week and a bit.
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS nudged up 0.3 percent. Volatile Shanghai stocks .SSEC, however, dropped 2 percent after stronger-than-expected local inflation data was interpreted as a negative for the struggling economy. [.SS]
South Korea’s KOSPI .KS11 rose 0.8 percent and Hong Kong’s Hang Seng .HSI gained 0.6 percent. Japan’s Nikkei .N225 climbed 1.3 percent.
Back in European trading, as the euro dropped, the dollar also spiked to 114.09 yen JPY= against the safe-haven Japanese, while Canada’s decision on Wednesday not to cut its interest rates kept Canada’s dollar CAD=D4 near a four-month high.