Mario Draghi, the head of the European Central Bank, said only a couple of months ago the bank was done cutting rates. And so it was that the bank cut rates by 25 bps overnight to 0.5 per cent.
The pressure for them to do so was immense, fair to say, but obviously this cut will achieve nothing. Having said that though, Draghi said the bank was ready to cut again and that it was even "technically prepared" for negative deposit rates (different from their main refinancing rate, which they cut to 0.5 per cent).
European banks have over €120 billion in excess liquidity deposited at the European Central Bank, on which they already receive no interest. The idea is to encourage these banks to lend, which it is thought they'll do if they get no return from hoarding cash. A negative deposit rate would be the next step, and really all it is is a charge for banks to deposit money – or a hoarding tax, if you prefer.
Would it work? Probably not, for the same reason that a zero deposit rate didn’t work. The issue isn’t the supply of credit – banks will always lend to credit-worthy customers. The issue is demand, and demand is low, not because the price of money is high but because risk aversion is extreme. Risk aversion is extreme because policymakers and politicians have helped create this constant state of fear.
The fear needs to subside but it’s not going to. Just look at Australia – mid-boom and we’re talking about recession again. For the fifth time in five years.
In any case, despite the European Central Bank's actions, the region's stocks had a comparatively modest session. The Dax was up 0.6 per cent, but the CaC was flat and the FTSE wasn’t much better, up only 0.15 per cent. The euro had a bigger move, down almost a big figure to 1.3065, while bond yields were all lower – helped by the rate cut and Draghi’s comments that Europe should stick with austerity.
Oddly, it was the US that put in the best performance. But I guess they had news that US jobless claims dropped to a five-year low (a fall of 18,000 to 324,000 for the week of April 27) that saw a decent bid across stocks and commodities. The latter in particular have had a great session, with crude up over 3 per cent to $93.98, copper 0.8 per cent higher and gold rising $20 to $1466. The jump in crude saw energy stocks outperform, as did industrials and tech. The main benchmarks more broadly were 0.9 per cent higher on the S&P500 (1597), 130 points higher on the Dow (14,831) and 1.3 per cent on the Nasdaq (3340).
Bits and piece otherwise – the US trade deficit shrank again in March to $38.8 billion from $43.6 billion as exports and imports fell. Then the ISM New York rose to 58.3 from 51.2.
For price action we saw the Australian dollar up about 20 pips to 1.0229, the British pound down about 20 pips to 1.5533 and the yen is at 97.94.
Finally, US rates were little changed, with the 10-year at 1.63 per cent, the 5-year at 0.65 per cent and the 2-year at 0.195 per cent. That’s about it, really.
For today, the SPI suggests our market will be 0.6 per cent higher. There really isn’t much apart from that, aside from producer prices at 1130 AEST. The main event will be payrolls tonight, and here the expectation is that 150,000 jobs were created in April, with the unemployment rate forecast to remain steady at 7.6 per cent.
Have a great weekend…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.