Scoreboard: Draghi’s deflation attack

Markets on both sides of the Atlantic pushed higher after the ECB took action to curb the threat of deflation, with both the Dow and S&P 500 hitting new records.

As expected, the ECB leapt to action last night in a desperate attempt to head off deflation and save the eurozone. In a unanimous decision the central bank slashed the main refinancing rate to 0.15 per cent from 0.25 per cent and cut the deposit rate that it pays to commercial banks for their money held at the ECB.

Indeed the ECB no longer pays them -- it charges them 0.1 per cent. In doing so the ECB becomes the first major central bank to charge commercial banks for depositing money. Finally, the ECB is conducting targeted long-term financing operations whereby it will lend commercial banks as much as they want for four years, if they tie that lending to households and businesses.

Having outlined these measures, the ECB head Mario Draghi then said “Are we finished? The answer is no. If need be, within our mandate, we aren't finished here."

Other than that, data was positive and in particular US jobless claims remain very low at 312,000 in the week to May 31, from 304,000.

Equities received the now almost mandatory post money-gush lift on both sides of the Atlantic. On Wall Street, the S&P 500 was up 0.7 per cent (1940) -- to a new record! The Dow was 98 points higher (16867) -- another new record! While the Nasdaq rose 1.1 per cent (4296) -- not quite a record. By sector, industrials, financials and utilities seem to have outperformed, while telecommunications underperformed. Over in Europe, the Dax was 0.2 per cent higher, the CaC rose 1.1 per cent, and the FTSE100 was off 0.5 per cent.

Forex markets saw some interesting price action. The euro initially dropped as you’d expect, hitting a low of $US1.3509, before a solid bid developed that took the unit over 150 pips higher -- to $US1.3661. The British pound followed suit, rising over 170 pips to $US1.6820, while the Australian dollar saw a steady bid through the session, rising about 60 pips at the time of writing to $US0.9340. The Japanese yen did little and sits at 102.4.

Rates whipped around on a 6bp range around the ECB’s meeting, bonds first seeing a solid bid, then a very strong offer (US 10-year at 2.632 per cent at the high), before being bid up again for the rest of the session. At the close, the US 10-year Treasury yield was little changed at 2.585 per cent though, traders not really knowing what to do. The 5-year was then at 1.62 per cent and the 2-year is at 0.379 per cent. Aussie futures didn’t do much in the end, 3s were flat at 97.170 and 10s were down 1 tick to 96.220.

Commodities saw mixed trading with gold up almost $10 to $1253 and silver up 1.3 per cent. Copper was off smalls and in the crude space, WTI fell 0.2 per cent ($102.5, and Brent rose 0.5 per cent ($108.9).

Elsewhere, and just prior to the ECB’s decision, data came out showing German factory orders surged 3.1 per cent in May (1.4 per cent expected) to be 6.3 per cent higher annually. We also saw data showing eurozone retail sales were up 0.4 per cent in April, much stronger than the 0 per cent expectation to be 2.4 per cent higher annually. In Britain, Halifax reports that house prices surged nearly 4 per cent in the month of May, which is the biggest jump in 12 years (to be 8.7 per cent higher annually in the three months to May). Finally and still in the UK, the Bank of England met and left rates unchanged at 0.5 per cent and kept the pace of money printing unchanged.

Markets today. The SPI suggests Aussie stocks will post a modest gain today -- up 0.2 per cent. Otherwise there is no decent data for Australia worth watching and it’s pretty sparse for the rest of the region. This afternoon we see German trade and industrial production figures, while the key release will of course be the US payrolls report. The market looks for a 215,000 lift in payrolls, with the unemployment rate expected to rise to 6.4 per cent.

Have a great day.