On 03 December, 2015 – European markets plummeted on disappointing central bank stimulus measures

European stocks plunged and the euro jumped after ECB stimulus moves disappointed market participants who were looking for a larger package.

United States

The S&P suffered its biggest loss since late September after European Central Bank actions disappointed investors while Fed Chair Janet Yellen's comments suggested the Federal Reserve is on track to raise interest rates this month. The Dow Jones industrials and S&P lost 1.4% and the Nasdaq dropped 1.7%. The euro soared against the US dollar and bond prices dropped, sending yields higher.

The European Central Bank announced a cut in one of its key interest rates in an effort to stimulate lending and help a modest economic recovery. The bank reduced the rate on deposits from commercial banks from minus 0.2% to minus 0.3%. The negative rate is intended to push banks to lend excess cash by imposing a penalty for leaving it at the central bank’s super-safe deposit operation. The announcement caused the euro to jump 3% against the dollar to about US$1.0945. Investors had been betting against the euro ahead of the announcement, expecting that more ECB stimulus would put pressure on the currency.

With the European Central Bank not expanding stimulus as much as expected, European bond prices fell sharply, sending yields higher. The sell-off in the dollar also affected United States Treasuries. The yield on the 10-year Treasury note jumped to 2.32%, up sharply from 2.18% the day before.

While the European Central Bank is easing policy, the United States Federal Reserve looks to be going in the opposite direction. In testimony to Congress’ Joint Economic Committee Thursday morning, Fed Chair Janet Yellen gave an upbeat assessment of the economy’s progress since the Fed’s last meeting in October, describing it as in line with its expectations for the labor market and inflation. She also was careful to point out the need to review coming data, including the Friday’s employment report.

These data reflect observations at 4:00 PM US ET. Gold at the afternoon London fixing was up 5 US cents to US$1,055.45. Copper futures were up 1.3% to US$2.06. WTI spot crude was up US$1.22 to US$41.16. Dated Brent spot crude was up US$1.41 to US$43.90. The US dollar was down against all of its major counterparts including the euro, yen, pound, Swiss franc and the Canadian and Australian dollars. The Dollar Index dropped 2.8%. The yield on US Treasury 30 year bond jumped 15 basis points to 3.06% while the yield on the 10 year note added 14 basis points to 2.32%.

Europe

European Central Bank President Mario Draghi expressed his confidence in the Eurozone’s recovery on Thursday as he unleashed a set of stimulus measures less radical than investors had hoped for. It was the stimulus measures which fell short of expectations on the size of the cut in the deposit rate, as well as both the size and duration of its quantitative easing program — that grabbed attention. The governing council clearly split with Bundesbank President Weidman — as to be expected — believing no increase in stimulus was necessary.

European stock markets fell sharply on Thursday's disappointment. German stocks had their biggest sell-off in more than 2 months while French stocks had their biggest one-day decline in more than three. The FTSE retreated 2.3%, the SMI lost 1.8% and both the CAC and DAX tumbled 3.6%.

The latest round of stimulus from the ECB began with a 10 basis points cut to its deposit rate which was taken deeper into negative territory to minus 0.30%. The size of the reduction was at the lower end of the 10 to 20 basis points cut economists had forecast. The Governing Council left the main refinancing rate unchanged at a record low 0.05% and the marginal lending facility rate at 0.30%. During his post-decision press conference, ECB President Mario Draghi announced that the bank's €1.1 trillion asset purchase program, or APP, will be extended until March 2017, "or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term." The ECB left the size of the monthly asset purchases under the APP unchanged at €60 billion, contrary to economists' expectations for a boost to as much as €80 billion.

Daimler, BMW and Volkswagen tumbled. Fresenius and Fresenius Medical Care declined along with Bayer. Total and Technip were lower. LVMH and L’Oréal dropped. However, in London, Whitbread climbed on a broker upgrade. Associated British Foods dropped on a broker downgrade. Miners Anglo American, BHP Billiton, Antofagasta and Rio Tinto dropped.

Expectations had been running high ahead of the meeting, after ECB President Mario Draghi had repeatedly talked up the need for further stimulus. Many investors had been expecting a cut of around 0.15% to the deposit rate and had predicted the ECB would increase the pace of its €60 billion of monthly bond purchases by €10 billion or more.

Asia Pacific

Asian stocks were mostly lower as investors braced for higher US interest rates following Federal Reserve Chair Janet Yellen’s latest comments. In a speech to the Economic Club of Washington, Yellen warned that waiting too long to end the era of near-zero interest rates could force the central bank to tighten too quickly, which would risk disrupting financial markets and the six-year expansion. There also was a lot of anticipation prior to the European Central Bank governing council meeting that would be held after markets here closed for the day.

The Nikkei was virtually unchanged (up1.77 points) as oil and coal producers led gains while utilities declined. Japan Petroleum Exploration jumped as crude prices rebounded after falling below US$40 a barrel on Wednesday. Daito Trust Construction advanced after saying orders for new building projects rose last month.

The Shanghai Composite climbed 1.4% as money market rates dropped and speculation mounted the government will take steps to bolster growth. Bank of China led a gauge of financial stocks to a four month high. The Hang Seng however, retreated 0.3%.

The S&P/ASX was down 0.6% while the All Ordinaries declined 0.5%. BHP Billiton and Rio Tinto were down. The Kospi index dropped 0.8%. Government data showed the nation’s economy in the third quarter was better than initially estimated, growing at the fastest pace in more than five years.

Looking forward

Australia posts October retail sales. Germany reports October manufacturers’ orders. Canada and the US post October international trade data. Canada also releases its November labour force survey. In the US, the November employment situation will be reported. OPEC meets in Vienna.

Please remember, the value of investments and the income from them can do down as well as up. Funds that invest in overseas markets may be subject to currency fluctuations. Investments in small and emerging markets can be more volatile than other overseas markets. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.