Wall St, dollar rise as ECB rate cuts sting euro
New York (Sept 4) Stock markets gained and the euro sank on Thursday after the European Central Bank unexpectedly cut already ultra-low interest rates and detailed plans to start buying loans and bonds next month to prop up the continent's struggling economy.
Faced with signs of further deterioration in the euro zone's prospects, the central bank cut major interest rates by another 10 basis points to new record lows, putting its deposit rate further into negative territory.
The euro zone flatlined in the second quarter of the year and the Ukraine crisis is weighing heavily on business confidence.
An index of European shares jumped nearly 1 percent , while the euro sank to a 14-month low against the dollar of $1.2994 before climbing back some to $1.3018, yet still off 1 percent for the day.
"The fact that the ECB is taking aggressive action to tackle its own maladies is likely to help risk markets in the U.S. such as equties and hurt bond markets," said Aaron Kohli, interest rate strategist at BNP Paribas in New York.
ECB President Mario Draghi told reporters the bank would buy broad portfolios of simple and transparent asset-backed securities and of euro-denominated covered bonds from October.
Taken together with the ECB's new long-term loans to banks, to be offered for the first time later this month "the newly-decided measures ... will have a sizeable impact on our balance sheet", Draghi said.
It's a surprise. Euro/dollar is getting slammed. The DAX should go up from here," said Darren Courtney-Cook, head of trading at Central Markets Investment Management.
Spanish, French and Portuguese stocks all gained over a full percentage point , while Germany's DAX rose 0.2 percent.
The ECB also cut its main refinancing rate to 0.05 percent from 0.15 percent previously and drove the overnight deposit rate deeper into negative territory, now charging banks 0.20 percent to park funds with it.
Wall Street opened higher, the dollar jumped, and U.S. government bonds were mixed with the yield on the 30-year Treasury touching a daily high of 3.2 percent. It was last at 3.17 percent, off 11/32 in price.
The Dow Jones industrial average rose 43.22 points or 0.25 percent, to 17,121.5, the S&P 500 gained 4.64 points or 0.23 percent, to 2,005.36 and the Nasdaq Composite added 13.66 points or 0.3 percent, to 4,586.22.
The dollar index was up 0.556 percent to a new 2014 peak of 83.456.
The U.S. Federal Reserve is on the verge of halting its own programme of bond-buying, encouraged by a steady stream of reasonably encouraging signs on jobs and growth on the other side of the Atlantic.
But the jury is still very much out on when it can raise interest rates. The ADP jobs report on Thursday showed private payroll growth of 204,000, a bit less than anticipated, but in line with expectations for Friday's U.S. jobs data out of the Labor Department. Economists are expecting payroll growth of 225,000 jobs.