Thursday, 15 November, 2018

Stocks ahead as European Central Bank upstages Fed

The European Central Bank headquarters in Frankfurt Germany Image The European Central Bank headquarters in Frankfurt Germany
Kelvin Reese | 17 June, 2018, 09:34

The European Central Bank also said it will hold off on raising interest rates until at least the summer of 2019, which was more accommodative than some investors had expected.

CURRENCIES: The dollar was flat at 110.65 yen and the euro strengthened to $1.1591 from $1.1560.

Ten-year government bond yields in Germany, the euro zone benchmark, fell around four basis points to 0.43 percent.

ANALYST'S TAKE: "While investors may fear higher interest rates, the stronger underlying economies that drive the stimulus withdrawal are positive for company profits", Michael McCarthy, chief market strategist at CMC Markets and Stockbroking, said in a daily commentary.

The central bank said Thursday that it would reduce its bond purchases in the final three months of the year, before halting them altogether at the end of December.

Meanwhile, German wholesale prices advanced 2.9 percent year-on-year in May, faster than the 1.4 percent increase seen in April, official data showed.

ASIA'S DAY: Asian stocks finished mixed.

The bank's bond-buying stimulus programme, also known as "quantitative easing" (QE) is credited with having helped the eurozone economy to recover from the region's financial crisis.

Mario Draghi
Image European Central Bank president Mario Draghi

The European Central Bank has trimmed its forecast for economic growth this year but raised its predictions for inflation.

In a statement, the bank said: "The governing council will continue to make net purchases under the asset purchase programme at the current monthly pace of €30bn until the end of September 2018".

Sterling steadied above its lowest level since November, after strong US retail sales and a more hawkish Federal Reserve earlier this week boosted the dollar and underlined policy divergence between the countries. Then, it did not commit to a specific end or any subsequent steps.

Chinese stocks led the losses, with the benchmark Shanghai Composite index plumbing a 20-month low, as investors anxious about the economic damage from the trade tensions with the United State.

Growth forecasts were revised higher, with the Fed now expecting a slight overshoot of inflation that would warrant short term rates to be marginally higher than their long term level. The coalition between the anti-establishment 5-Star Movement and the anti-immigration League have promised spending that could lead to Italy violating eurozone limits on deficits.

Sitting at around 1.1818 versus the dollar before the announcement, the euro fell to 1.1681 during Draghi's subsequent press conference, shipping around 0.9 percent in value for the session. Over the previous days, we assumed EUR/USD to stay north of the 1.1510 support as tensions on Italy eased and as we expected the European Central Bank to make a next step to policy normalisation.

The ECB's effort in recent years to drop those borrowing rates has had its critics in some parts of Europe, especially Germany, who said it harmed savers and reduced the incentive for indebted governments to fix their finances by lowering borrowing costs.

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