The ECB moved to ease banks' funding pressures overnight, but markets fell anyway on dashed hopes.

The ECB cut rates as expected to 1 per cent, from 1.25 per cent (it wasn’t unanimous though) and also introduced a range of other measures, flagged in the press previously, to free up liquidity and make it easier for banks to get funds. Specifically, the bank will conduct two unlimited three-year loans; they have eased collateral rules (now allowing credit claims) and also cut the reserve ratio to 1 per cent of total assets (from 2 per cent previously).

Markets, however, didn’t react well, but not so much because these measures aren’t welcome – they’ll go a long way in heading off any credit crunch. The disappointment occurred because it doesn’t look like the ECB will be pulling out the ‘big bazooka’ for sovereigns. Recall comments from the head of the ECB, Mario Draghi, that "other measures might follow” once treaty changes were agreed to at the summit tonight. He said he was "surprised by the implicit meaning that was given” to that statement. People were expecting the ECB to print but he seems to have put the smack down on that, reiterating again that it was a limited, finite program. Something else that probably didn’t help sentiment was news from the EBA that Europe’s banks need to find €114.7 billion in new capital, which is higher than their estimate in October of €106.4 billion.

Risk off! Italian, Spanish and French bond yields shot higher and spreads to bunds widened significantly as the latter rallied. The 2-year Italian yield spiked 58bps to 6.23 per cent while the 10-year was about 46bps higher to 6.45 per cent. The euro was then smashed, dropping from a high of 1.3459 to 1.3340 currently, taking the Australian dollar along for the ride. So having hit a high of 1.0380, our dollar was belted, losing two big figures to sit at 1.0178 currently. European stocks for their part all ended lower – the Dax off 2.01 per cent, the CaC down 2.5 per cent, while the FTSE fell 1.1 per cent. In all cases, financials were a key deadweight.

Across the Atlantic, not even a sharp drop in jobless claims could stem the tide on Wall Street. New claims were off 23,000 to 381,000 (lowest since February) in the week to December 3, while continuing claims dropped 174,000 to 3.58 million, which is the lowest level of continuing claims in three years. Investors barely blinked and the offer was on. By the close of trade, the S&P 500 was down 2.1 per cent (1,234), with selling momentum picking up in the last hour. Financials, basic materials and energy were the key underperformers, but it was a broad spread of red. The Dow fell 199 points to 11,998, the Nasdaq lost 2 per cent (2,596), while Australia's SPI is down 1.5 per cent (4218).

Commodities have been trashed as well – WTI down 2.2 per cent ($98.3) and Brent off 1.5 per cent ($107.9). In the metal space, gold is off $30 to $1707, silver has dropped over 3 per cent while copper is down 1.5 per cent.

Needless to say, treasuries rallied, with the 5- and 10-year treasury yield falling about 6bps so far to 0.84 per cent and 1.98 per cent respectively. The 2-year was off 2bps to 0.22 per cent. Aussie futures then followed the US lead, the 3s up 6 ticks (from 1630 AEDT) to 96.89, while the 10s were also up 6 ticks to 96.10.

Bits and pieces otherwise. The RBA governor spoke last night but made no mention of policy-related matters. The BoE kept rates steady at 0.5 per cent and made no changes to their asset purchase program. In terms of the data, US wholesale sales were strong in October, rising by 0.9 per cent to be 13 per cent higher annually. Inventories rose 1.6 per cent after a couple of months of weakness (looks like that restocking is starting to come through). Finally, CBA and Westpac last night joined ANZ and NAB in passing on the full 25bps rate cut from the RBA.

Looking at the day ahead, there isn’t a lot for Australia, while the Kiwis put out credit card spending at 0845 AEDT. Elsewhere, we see Chinese CPI at 1300 AEDT, German trade figures at 1800 AEDT and then at some stage over the weekend, Chinese industrial production figures are due. For the US, just watch out for the trade figures and Michigan consumer confidence. The European summit is obviously the key focus though.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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