Bloomberg News

Euro Slips, Bonds Rally on ECB as S&P 500 Drops With Oil

September 04, 2014

BOJ Governor Haruhiko Kuroda

Haruhiko Kuroda, governor of the Bank of Japan. Photographer: Junko Kimura-Matsumoto/Bloomberg

The euro weakened to a 13-month low and sovereign bonds rallied as the European Central Bank unexpectedly cut interest rates and announced a bond-buying program. U.S. stocks fell for a third day as energy shares slumped with oil, while Treasuries declined.

The Stoxx Europe 600 Index climbed 1.1 percent to the highest in two months. The Standard & Poor’s 500 Index dropped 0.2 percent at 4 p.m. in New York, after rising 0.5 percent earlier. The euro weakened against all of its 31 peers, falling below $1.30 for the first time since July 2013. The yield on 10-year rates from Ireland to Italy dropped to record lows, and two-year note yields dropped below zero in eight European countries. Treasury yields rose to a seven-year high versus their developed-market peers. Crude fell 1.1 percent.

The ECB cut interest rates and will start buying assets, boosting the flow of funding for the euro-area economy while stopping short of broad-based quantitative easing. U.S. data showed service providers expanded in August at the fastest pace in nine years, before a government report tomorrow on jobs growth. Ukrainian President Petro Poroshenko said he’s ready to declare a cease-fire if peace talks with pro-Russian rebels take place as scheduled tomorrow.

The ECB's Options to Aid the Economy

“The ECB put a twist on what everyone was thinking, cutting the main rates and deposits, the type of policy easing that’s positive for the market,” Stephen Carl, principal and head equity trader at New York-based Williams Capital Group LP, said in a phone interview. “It should pump in liquidity and give people a reason to put money to work.”

Asset Purchases

The eurosystem will “purchase a broad portfolio of simple and transparent securities” and euro denominated covered bonds, ECB President Mario Draghi said in a press conference in Frankfurt. In committing cash to the market for asset-backed securities, Draghi is making good on his pledge to help rekindle an asset class that can funnel loans to the real economy and ease funding conditions for the region’s banks.

Euro-area inflation languished at 0.3 percent last month, far below the ECB’s 2 percent target. Draghi said details of the program will be announced after the October rate-setting meeting.

The euro weakened 1.5 percent to $1.2949, its lowest level versus the dollar since July 2013. The Bloomberg Dollar Spot Index jumped 0.7 percent to the highest in a year.

“The rate cuts have clearly taken the market by surprise judging by the immediate euro reaction,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “It’s clear the ECB wants a weaker euro and they are prepared to do what is necessary to get it.”

Bond Yields

European bonds rallied. Germany’s two-year yield fell 6 basis points to minus 0.081 percent, touching the lowest level since December 2012. The yield on Italian 10-year bonds slid 11 basis points to 2.35 percent. The rates on French and Spanish 10-year bonds declined 3 basis points to 1.30 percent and 11 basis points to 2.16 percent, respectively.

Two-year rates were negative in Austria, Belgium, Finland, France and the Netherlands, as well as non-euro-area nations Denmark and Switzerland, according to data compiled by Bloomberg.

Forty-five percent of all government bonds yield less than 1 percent, Bank of America Corp. said, as central bankers in Japan, Europe and the U.K. decide on how to support their economies. Speculation that the ECB would start buying debt in the year ahead had pushed the yield spread between U.S. 10-year Treasuries and German bunds toward a 15-year high.

The yield on 10-year Treasuries rose 5 basis points to 2.45 percent today.

‘Done’ Rally

David Tepper, founder of $20 billion hedge-fund firm Appaloosa Management LP, called the bond-market rally “done.” “Draghi wants inflation in the euro zone -- he will not stop,” Tepper, 56, said in a telephone interview. “It’s the beginning of the end of the bond-market rally.”

Stimulus measures have helped the Stoxx 600 rally 62 percent from a low in September 2011. Since taking over in November of that year, Draghi has pledged to hold borrowing costs low and said in July 2012 he would do “whatever it takes” to save the euro.

European equities reversed an earlier decline today, as a gauge of lenders in the Stoxx 600 posted its biggest two-day increase since January. UniCredit SpA rose 5.1 percent, while Intesa Sanpaolo SpA gained 5.6 percent. Standard Life Plc jumped 8.1 percent after agreeing to sell its Canadian business to Manulife Financial Corp. for C$4 billion ($3.7 billion).

Erasing Gains

The S&P 500 (SPX) erased gains in afternoon trading, dropping for a third day in the longest string of declines since June. Energy shares retreated 1.3 percent for the largest loss among 10 S&P 500 groups. Chevron Corp. and Exxon Mobil Corp. decreased more than 0.8 percent.

The S&P 500 fell yesterday as Apple Inc. tumbled and investors assessed the prospects for a resolution to the conflict in Ukraine.

“The market is kind of tired,” Walter Todd, who oversees about $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates LLC, said in a phone interview. “We saw such a quick bounce off the 1,900 level in early August straight up to a new high. In the very near-term, you’ve got a variety of headwinds and exhaustion around the move higher.”

The benchmark index gained 3.8 percent in August, the biggest monthly increase since February, amid positive economic data and investor expectation that central banks will continue to underpin global economies.

Economic Data

The Institute for Supply Management’s non-manufacturing index climbed to 59.6, the strongest since August 2005, from 58.7 a month earlier, the Tempe, Arizona-based group said today. Readings greater than 50 signal expansion in service industries.

Other data today showed applications for unemployment benefits in the U.S. were little changed last week as an improving economy prompted businesses to retain staff. A private report on payrolls indicated U.S. firms added 204,000 jobs in August, fewer than the 220,000 estimated in a Bloomberg survey of economists.

The monthly Labor Department jobs report due tomorrow will show that companies boosted payrolls in August by more than 200,000 for a seventh-straight month, according to a separate Bloomberg survey.

Japan Stimulus

The yen jumped 1.2 percent versus the euro. It slipped 0.4 percent to 105.16 per dollar as central bank Governor Haruhiko Kuroda said a stronger greenback wasn’t particularly negative for the Japan. The Bank of Japan kept its record stimulus unchanged at the conclusion of a two-day meeting, maintaining its pledge to increase the monetary base at an annual pace of 60 trillion yen ($570 billion) to 70 trillion yen.

Russia’s Micex Index added 0.6 percent after yesterday gaining 3.5 percent, the most since March 18. The ruble lost 0.4 percent after yesterday’s 1.6 percent rally. Ukraine’s hryvnia declined 2.7 percent.

Emerging-market equities rallied yesterday after Russian President Vladimir Putin proposed peace terms with Ukraine. Poroshenko said on Ukrainian television he’ll call a halt to the fighting if negotiations with pro-Russian rebels begin as planned in the capital of Belarus. Fighting continued in the southeast, with Ukrainian television showing a column of Russian tanks moving toward Mariupol on the Sea of Azov and skirmishes on the outskirts of the city.

The MSCI Emerging Market Index dropped 0.2 percent after closing yesterday at a three-year high.

West Texas Intermediate oil declined 1.1 percent to $94.45 a barrel after a government report showed that U.S. refineries reduced operating rates as the peak driving season came to an end. Crude rallied 2.9 percent yesterday.

Nickel reached a seven-week high amid concern the Philippines will join Indonesia in barring ore exports. The Philippines should move toward a ban, the environment secretary said today, offering support to a bill proposing restrictions that may threaten nickel ore supplies to China.

To contact the reporters on this story: Will Hadfield in London at whadfield@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editors responsible for this story: Stuart Wallace at swallace6@bloomberg.net; Lynn Thomasson at lthomasson@bloomberg.net Jeff Sutherland


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