In the past week, investors had their hopes pumped up and then punctured by the words of the president of the European Central Bank, Mario Draghi.
Leading up to Thursday's ECB policy meeting, Mr Draghi had raised expectations by pledging to do whatever it takes to keep the euro from splintering. His comments inspired a rally on the local market that, by Tuesday, had surged 3.5 per cent.
By yesterday, however, a chunk of those gains had been erased after Europe's central bankers failed to deliver the expected "shock and awe". Instead, they chose to keep rates on hold, and Mr Draghi appeared simply to reiterate his earlier stance.
As a consequence, Europe's market dropped 3 per cent, US stocks shed 0.7 per cent, and Australia's market was dragged down with them, falling 1.1 per cent yesterday.
For the week, the benchmark S&P/ASX200 Index rose 11.8 points, or 0.3 per cent, to close at 4221.5.
What's next for Europe? Analysts say things are likely to follow a predictable course: there will be renewed action in troubled "periphery" bond markets - particularly Spanish and Italian bond markets - as traders test the resolve of Europe's governments and the ECB's commitment to keeping the euro together. So, expect the rollercoaster to continue.
But Westpac's chief currency strategist, Robert Rennie, says the latest developments in Europe are better than investors realise.
He sent a note to clients yesterday explaining why. Since Mr Draghi's first meeting as the ECB president late last year, he has cut the bank's interest rate by 0.25 percentage points he has announced two 36-month, long-term refinancing operations he has cut the collateral requirements for Europe's banks and cut their reserve ratio from 2 per cent to 1 per cent he has cut the deposit rate to zero (something the US Fed has not dared do) and, on Thursday, he took some "notable steps towards proper quantitative easing", one of which opened the possibility that the ECB may relinquish its seniority status in future bond buying programs.
"Overall, there was probably enough [from the ECB meeting] to reduce the risk of a eurogeddon but not enough to satisfy buyers of risky assets," Rennie wrote, explaining the market's reaction yesterday.
"[But] with the fullness of time, markets will come to understand that there are deep and meaningful developments afoot at the ECB."
Watch this space, then.
Locally for the week, Telstra was up 6?, at $4.02, hitting $4 for the first time in four years, as the telco started to benefit from its recent involvement with the national broadband network and growth in its mobile and broadband businesses.
BHP Billiton fell 12?, to $31.30, after it said it had to write down the value of its American shale gas assets by $US2.84 billion ($2.73 billion). Rio Tinto gained 1?, at $52.01, after it said it would soon start cutting office jobs in Melbourne and Sydney to deal with falling commodity prices and soaring costs. CSL dropped $1.98, to $40.28, after the head of the blood products and vaccines maker said he would leave the company next year, after 23 years in the job.
Consolidated Media Holdings rose 5? to $3.44 after News Limited moved a step closer to gaining what analysts said would be high-earning pay TV assets, winning regulatory approval for its acquisition of Consolidated Media.
ALL ORDS AUSTRALIA
JUL 30 TO AUGUST 03
HIGH 4290.14
LOW 4234.39
4243.0
8.61 (0.2%)
SOURCE: BLOOMBERG
Frequently Asked Questions about this Article…
What happened at the recent ECB meeting and how did markets react?
The European Central Bank held rates on hold instead of delivering the large stimulus some investors expected. Mario Draghi largely reiterated his stance, which helped earlier rallies but led to a pullback when the surprise was muted: Europe’s market fell about 3% yesterday, US stocks shed 0.7%, and Australia’s market fell 1.1%. For the week the S&P/ASX200 rose 11.8 points (0.3%) to close at 4,221.5.
Which policy moves has Mario Draghi and the ECB already taken recently?
According to the article, since Draghi became ECB president the bank has cut its policy rate by 0.25 percentage points, announced two 36‑month long‑term refinancing operations, loosened collateral rules for banks, cut the reserve ratio from 2% to 1%, reduced the deposit rate to zero, and taken steps toward quantitative easing — including opening the possibility the ECB might relinquish seniority in future bond‑buying programs.
How might the ECB developments affect European 'periphery' bond markets (Spain and Italy)?
Analysts in the article expect renewed pressure and volatility in periphery bond markets — particularly Spanish and Italian bonds — as traders test the resolve of Europe’s governments and the ECB’s commitment to keeping the euro together. The article says to expect the rollercoaster to continue in those markets.
Why did Telstra shares jump and what drove the share price to over $4?
Telstra rose about 6% to $4.02, hitting $4 for the first time in four years. The article attributes the gain to benefits from Telstra’s recent involvement with the national broadband network (NBN) and growth in its mobile and broadband businesses.
What caused BHP Billiton’s share price fall and how big was the writedown?
BHP Billiton fell about 12% to $31.30 after announcing a write‑down on its American shale gas assets of US$2.84 billion (around A$2.73 billion), according to the article.
How did Rio Tinto and CSL announcements affect their share prices?
Rio Tinto gained about 1% to $52.01 after saying it would soon start cutting office jobs in Melbourne and Sydney to address falling commodity prices and rising costs. CSL fell $1.98 to $40.28 after the company’s long‑time head of the blood products and vaccines maker said he would leave next year after 23 years in the job.
Why did Consolidated Media Holdings rise and what role did News Limited play?
Consolidated Media Holdings rose about 5% to $3.44 after News Limited moved a step closer to acquiring what analysts called high‑earning pay TV assets, winning regulatory approval for its acquisition of Consolidated Media, per the article.
What should everyday investors watch next given the ECB actions and market moves?
The article suggests investors should watch ongoing ECB developments and peripheral European bond markets for renewed volatility, noting that Westpac strategist Robert Rennie believes there are meaningful changes afoot at the ECB that markets will come to understand over time. Locally, keep an eye on index moves (the S&P/ASX200) and company news such as writedowns, job cuts and management changes that drove recent share movements.
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