US, European stocks fall as ECB falls short of expectations
NEW YORK (AP) — U.S. and European markets sank on Thursday after the European Central Bank announced stimulus plans that were less aggressive than investors were expecting. Bond prices fell sharply in Europe and the euro rose sharply against the dollar. U.S. bond prices also fell, sending yields higher.
KEEPING SCORE: The Dow Jones industrial average lost 262 points, or 1.5 percent, to 17,467 as of 2:30 p.m. Eastern. The Standard & Poor’s 500 index fell 33 points, or 1.6 percent, to 2,046 and the Nasdaq composite fell 102 points, or 2 percent, to 5,021. The sell-off was broad, with all 10 sectors of the S&P 500 declining. Health-care and consumer discretionary stocks fared the worst.
DRAGHI DISAPPOINTS: The European Central Bank announced a cut in one of its key interest rates in an attempt to stimulate lending and help a modest economic recovery. The bank reduced the rate on deposits from commercial banks from a negative 0.2 percent to a negative 0.3 percent. The negative rate is intended to push banks to lend excess cash by imposing a penalty for leaving it parked at the central bank’s super-safe deposit facility.
“In the last couple of years, Mario Draghi and the ECB would typically over-deliver on what they indicated they would do to help stimulate the economy. So a lot of investors overbought bonds on expectations that Draghi would over-deliver. This time, he didn’t, and he disappointed the market quite a bit,” said Bob Michele, head of global fixed income at JPMorgan Asset Management.
REACTION: The ECB’s announcement caused the euro to jump 3 percent against the dollar, a large move, to $1.0952. Investors had been betting against the euro ahead of the announcement, expecting that more central bank stimulus would put pressure on the currency. European stocks had one of their worst days in months. Germany’s DAX plunged 3.6 percent, its worst day since September’s market volatility. France’s CAC-40 index lost 3.6 percent and the U.K.’s FTSE lost 2.3 percent.
“Financial markets were expecting the ECB to do ‘whatever it takes’ to stimulate inflation, and instead the ECB did ‘maybe what it’ll take’ to stimulate inflation,” said Guy LeBas, head of fixed income at Janney Montgomery Scott.
BOND SHIFT: With the ECB not expanding stimulus as much as expected, European bond prices fell sharply, sending yields higher. Greater stimulus would have put downward pressure on interest rates. The yield on the 10-year German government bond soared 0.20 percentage points to 0.67 percent, a massive move in the bond market. The yield on the 10-year French government bond rose 0.20 percentage points to 0.99 percent, also a substantial move.
The sell-off in the dollar also impacted U.S. Treasuries. The yield on the 10-year Treasury note jumped to 2.33 percent, up sharply from 2.19 percent the day before.
FED ACTION: While the ECB is easing policy, the U.S. Federal Reserve looks set to raise interest rates later this month for the first time in nine years. In comments Wednesday, 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 upcoming data, including the U.S. jobs report Friday.
Economists forecast that U.S. employers created 200,000 jobs in November, and the unemployment rate remained steady at 5 percent.
ENERGY: Benchmark U.S. crude jumped $1.14, or 2.9 percent, to close at $41.08 a barrel on the New York Mercantile Exchange. Brent crude, which is used to set prices for international oils, climbed $1.53, or 3.6 percent, to $44.01 a barrel in London.
METALS: Gold rose $7.40, or 0.7 percent, to $1,061.20 an ounce, silver rose seven cents to $14.08 an ounce and copper rose three cents to $2.06 a pound.