Bonds, Stocks Fall as ECB Downplays Extra Stimulus; Crude Surges

ECB Leaves Rates, Stimulus Program Unchanged
  • Euro dominates as Draghi said more bond buying not discussed
  • Nikkei 225 futures signal gains after yen rally interrupted

Bonds declined with stocks, while the euro strengthened after the European Central Bank downplayed the need for more economic stimulus. Oil extended its surge.

The ECB rhetoric spurred a selloff in debt around the world, with yields on Treasuries and German bunds due in 30 years climbing the most in more than a month. Global equities halted a five-day advance, exporters led European shares lower while the S&P 500 Index retreated from near a record high. The euro rose against all but one of its 16 major peers. Oil jumped after data showed the biggest drawdown in U.S. crude inventories in 17 years.

Traders were taken aback by ECB chief Mario Draghi damping down the prospect of an increase in asset purchases at a time when concern over the impact of Brexit on the euro area is mounting. About half of respondents to a Bloomberg survey foresaw action by the ECB at Thursday’s meeting, with almost all the others predicting movement in October or December. Stimulus efforts by Europe and Japan have hampered the Federal Reserve’s plans to raise rates again after lifting them from near zero in December.

“A lot of people wanted to see a bit more stimulus from Draghi today, or at least an extension to the program,” said Yogi Dewan, the chief executive officer of Hassium Asset Management in Gerrards Cross, U.K. His firm manages about $1 billion. “At the end of the day, Europe’s economy isn’t in great shape, inflation doesn’t look exciting and there are a bunch of political risks to reckon with. It’s very unusual for Draghi to be this hawkish. It looks like he’s taking the lead from the Fed. Everyone is just on hold.”

For more on Draghi’s commentary, click here.

In the U.S., where policy makers are watching for consistent signs of strength in the labor market before raising interest rates, filings for unemployment benefits unexpectedly dropped to the lowest level in seven weeks. Odds on the Fed boosting rates at its September meeting inched up to 28 percent, still six percentage points below where they were a week ago.

Bonds

Europe’s benchmark sovereign notes extended losses after Draghi’s announcement. German 30-year bund yields jumped nine basis points, or 0.09 percentage point, to 0.51 percent, while yields on 10-year Spanish bonds increased six basis points to 0.99 percent, after earlier falling to a record-low 0.90 percent.

“There’s a whiff of complacency,” Patrick O’Donnell, a money manager at Aberdeen Asset Management Plc in London, said in a note. “There’s been no changes to policy. Data since the last forecast round had been OK, but the outlook for inflation and the known political risks coming up suggest that the ECB should be being a bit more proactive.”

A gauge of the Treasury yield curve widened to its steepest point in three weeks as the ECB’s commentary was seen crimping overseas demand for longer-dated debt, which offers some of the highest sovereign yields.

Yields on 30-year Treasuries rose seven basis points to 2.30 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. Ten-year rates added six basis points to 1.60 percent.

Currencies

The euro added 0.2 percent to $1.1260, the strongest level since Aug. 25 on a closing basis.

“Same old stuff about risks, but if you want the currency to go down you need to feed the market more stimulus or the chance that it’s coming soon,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA in London. “And that’s not in the comments.”

Even though the ECB hasn’t announced any further stimulus, the lackluster economy is encouraging speculation that officials will need to act, sooner or later. Citigroup Inc.’s Economic Surprise Index for the euro area dropped below zero last week, signaling that data in the region are falling short of forecasts.

The Bloomberg Dollar Spot Index, which measures the U.S. currency against a basket of 10 peers, rose 0.4 percent. Mexico’s peso led losses among the world’s major currencies, while the yen weakened 0.7 percent, snapping a three-day rally.

Stocks

The MSCI All-Country World Index dropped 0.1 percent, after gaining 1.8 percent over the last five days.

The Stoxx Europe 600 Index slipped 0.3 percent as the euro’s advance hurt prospects for export profits. Daimler AG and BMW AG dragged Germany’s DAX Index lower a day after it became the first major euro-area equity gauge to recoup its losses for the year.

The S&P 500 Index fell 0.2 percent, after closing little changed on Wednesday. Apple Inc. was the biggest drag on the gauge, falling the most in two months, a day after the introduction of its latest iPhone. Tractor Supply Co. tumbled 17 percent, the biggest drop in 16 years after cutting its profit outlook. Energy producers rallied with crude.

Futures on Japan’s Nikkei 225 Stock Average rallied amid the yen’s retreat, with contracts traded in Osaka up 0.4 percent to 16,880. Futures on other Asian equity indexes diverged, however, with contracts in New Zealand, Australia and South Korea declining, while those in Hong Kong and China advanced.

Commodities

West Texas Intermediate oil for October delivery soared 4.7 percent to $47.62 a barrel on the New York Mercantile Exchange, its biggest one-day gain since April.

U.S. crude inventories fell by 14.5 million barrels last week, according to the Energy Information Administration, the biggest drop since January 1999. A 905,000-barrel increase was projected by analysts surveyed by Bloomberg before the release. Tropical Storm Hermine also moved into the Gulf of Mexico Aug. 28, disrupting shipping and output before moving northeast. Imports tumbled by 1.85 million barrels.

“The huge number is clearly a result of storm activity in the Gulf,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It’s a fluke but, all the same, prices are going to move higher in the short term.”

Gold futures for December delivery fell 0.6 percent to settle at $1,341.60 an ounce at 1:43 p.m. on the Comex in New York. Aggregate trading was 16 percent below the 100-day average for this time, data compiled by Bloomberg show. Prices touched $1,357.60 on Wednesday, the highest since Aug. 19.

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