Thursday 21:00 GMT
The European Central Bank’s latest policy surprise fuelled a volatile session for the euro and government bonds as participants appeared, initially at least, to struggle to assess its implications.
But European stocks rose to 11-month highs while Wall Street overcame an early bout of fatigue to set yet more record peaks.
Oil prices resumed their upward path, even as a stronger dollar unsettled gold and base metals.
The ECB took centre stage as it announced it would extend its asset-buying programme beyond March next year until the end of 2017 — but would slow the pace of its monthly purchases from €80bn to €60bn.
It also expanded the range of securities it can buy under its quantitative easing programme by allowing the purchase of bonds yielding less than the ECB’s deposit rate of minus 0.40 per cent, and lowering the minimum required remaining maturity from two years to one.
“It is the combination of extending and tapering that we thought would not yet happen,” said Carsten Brzeski, an economist at ING. “Lower but longer, instead of ‘extend and pretend’, has given markets something to chew on.”
Economists at Deutsche Bank highlighted that Mario Draghi, ECB president, had been at pains to stress that the slowing in the pace of QE was not the announcement of tapering.
But they said: “Our interpretation is that this is a long, slow, disguised and clever taper.
“There has been an underlying improvement in the macro picture and the size of QE has been adjusted because the deflation risks foreseen in March have subsided.”
The euro leapt to a four-week intraday high against the dollar of $1.0872 following the ECB news, before rapidly retreating to $1.0615, down 1.3 per cent on the day.
“Our initial conclusion from the ECB announcements today is that the dynamic of monetary policy divergence will remain firmly in place, despite the slower pace of purchases, which we believe keeps the probability high that euro/dollar will breach parity in the first half of 2017,” said Derek Halpenny, analyst at Bank of Tokyo-Mitsubishi UFJ.
Meanwhile, longer-dated eurozone government bonds sold off sharply, pushing the yield on the 10-year German Bund up to 0.453 per cent — the highest since January — before paring their losses. It ended the day at 0.38 per cent, up 3bp.
The two-year German yield, by contrast, fell as low as minus 0.764 per cent, before pulling back to 0.73 per cent, still down 6bp on the day.
The spread between the two and 30-year German yields reached the widest point since July 2015.
“The ECB is prioritising yield curve steepeners,” said Lena Komileva at G+ Economics. “The policy decision to embed a technical ‘taper’ in its nine-month QE programme extension, to ensure policy continuity, sends a clear signal that there is a limit to how far the ECB’s QE can run and how high its balance sheet can grow beyond 2017, before it runs into hard technical, and political, constraints.”
In the US, the 10-year Treasury yield was up 6bp at 2.40 per cent.
The ECB’s move cheered European equity bulls, with the financial sector putting in another strong performance.
The pan-regional Stoxx 600 index rose 1.2 per cent to its highest close since early January with a 2.3 per cent jump for the banking sub-index taking the sector’s advance this week to more than 10 per cent. The Xetra Dax in Frankfurt rose 1.8 per cent to a one-year peak.
Italian lenders continued to outperform as optimism about their outlook in the wake of last weekend’s emphatic ‘No’ vote in the country’s constitutional referendum.
The FTSE MIB index in Milan rose another 1.6 per cent, for a three-day advance of more than 8 per cent.
Wall Street initially struggled to extended Wednesday’s big gains but the S&P 500 subsequently rallied to end 0.2 per cent higher at a fresh record close of 2,246, after earlier touching an intraday all-time peak of 2,251.69.
The Dow Jones Industrial Average and the Nasdaq Composite also touched fresh record highs.
Renewed strength for financials once again offered support to the wider US market — continuing a trend seen since Donald Trump’s victory in the presidential election a month ago.
Japan’s Topix index rose 1.5 per cent to its highest close of 2016, with Tepco gaining as much as 17.5 per cent — its daily limit — on media reports the government will increase by more than half an interest-free loan to help the Fukushima nuclear power plant operator cover rising compensation and decontamination costs.
Australia’s S&P/ASX 200 advanced 1.2 per cent, driven by mining stocks as the iron ore price continues to rally. Hong Kong’s Hang Seng gained 0.3 per cent but China’s Shanghai Composite reversed a modest early gain to be off 0.2 per cent despite some encouraging trade data.
The euro’s retreat against the US currency helped push the dollar index up 0.9 per cent to 101.08, while the dollar was 0.2 per cent higher against the yen at ¥113.99 and sterling was down 0.3 per cent at 1.2580.
The Turkish lira, which earlier in the day had strengthened by 1.5 per cent against the dollar, again succumbed to concerns about President Erdogan’s continued “jawboning” against the central bank’s monetary policy and news of economic reforms. The buck rallied to stand 1.6 per cent stronger at TL3.4422 in late trading.
Brent, the international crude benchmark, settled 1.7 per cent higher at $53.89 a barrel while US West Texas Intermediate was 2.2 per cent higher in late trade at $50.86.
But the firmer dollar unsettled metals prices. Gold was down $3 at $1,170 an ounce, while copper reversed an earlier rise to close 0.1 per cent lower in London at $5,782 a tonne.
Additional reporting by Peter Wells in Hong Kong
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