Scoreboard: Draghi whirlwind

The prospect of an ECB rate cut next month pushed the euro lower and stocks higher, but failed to hold Wall Street in the end.

US stocks had pushed higher initially, buoyed by a better-than-expected jobless claims result and price action over in Europe. The market had expected claims to dip from last week’s 342,000, but ‘only’ to 325,000. Following the surprise strength in payrolls recently, anything better than that was likely to spur some buying interest in the market -- and it did initially after claims came in at 319,000 (week to May 3). The Dow hit a record high at that point.

At about the same time claims came out, Mario Draghi, the head of the European Central Bank, hit the airwaves stating that the ECB could take action to lift inflation (read: looser policy) as soon as next month. Although whether that takes the form of a rate cut or money printing isn’t clear. Naturally, the prospect of more free money helped lift the mood -- stocks surged, the euro slumped and Italian and Spanish bonds rallied hard, with yields hitting record lows (just kicking the can, people). The problem for US stocks was that the bid didn’t last. A few hours after Europe closed high, the offer came on Wall Street. I can’t really see a clear catalyst though -- tech stocks certainly sold off, but then they seemed to lag if anything.

Equities then closed mixed in the US. The S&P500 ended 0.1 per cent lower (1875) having been up 0.6 per cent at the high. Similarly, the Dow dropped 72 points from the high to close 32 points higher at 16,550. The Nasdaq was the key underperformer, closing 0.4 per cent lower (4051). Over in Europe, the Dax closed 0.9 per cent higher, the CaC was up 1.4 per cent and the FTSE100 rose 0.6 per cent.

Forex markets saw plenty of action. The euro whipped around after the ECB’s comments, initially rallying hard after the bank kept rates unchanged and didn’t really offer the market any colour in the accompanying press release. Mario Draghi’s press conference changed all that and the offer came on hard. Specific to the euro, Draghi noted that a strong euro in the context of low inflation was a problem. So from the peak, the euro dropped 160 pips to 1.3838. The British pound was dragged down as well, but moves here were more muted -- 30 pips to the downside to 1.6930. As for the Australian dollar, the unit was bid up following yesterday’s solid employment numbers, but didn’t really move much from there. As I write, the local currency is at 0.9375. The yen meanwhile sits at 101.6.

Rates saw better action than what they are used to. The US 10-year Treasury note traded on a 5 bps range ending 1 bps lower at 2.613 per cent. The 5-year in turn traded on a 6 bps range ending about 3 bps lower at 1.623 per cent, while the 2-year is at 0.3949 per cent. Aussie futures were up about 2-2.5 ticks on the 3s and the 10s (97.14 and 96.19 respectively).

Commodities were mixed again. Gold was pretty much flat at $1289, silver fell about 1.1 per cent though and copper rose about 1 per cent. In the crude space, WTI fell 0.5 per cent to $100.3, while Brent was off 0.1 per cent ($108).

Elsewhere, German industrial production fell 0.5 per cent in March after a 0.6 per cent rise the month prior. House prices in the UK fell 0.2 per cent in April, after a 1.2 per cent fall the month prior. Annually, house prices are 8.5 per cent higher. Finally, the Bank of England held rates steady as expected and opted not the change the QE program.

In markets today, the SPI suggests our stocks will be flat. In terms of information content, the key event for our market will be the Reserve Bank’s Statement on Monetary Policy at 11.30am (AEST). Chinese inflation figures come at the same time. Elsewhere abroad, German trade data comes out at 4pm (AEST), followed by UK industrial production at 6.30pm (AEST).

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.