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Published: Friday August 3, 2012 MYT 8:11:00 AM
Updated: Friday August 3, 2012 MYT 12:18:42 PM

GLOBAL MARKETS-Stocks, euro tumble as ECB disappoints markets


NEW YORK: Global stocks and the euro tumbled o n T hursday after the European Central Bank disappointed investors who were hoping for immediate action to combat the euro zone debt crisis.

The ECB signaled plans to push down borrowing costs for euro zone countries through upcoming bond purchases, though the move is likely weeks away.

The central bank, which said it would wait to see if the euro zone economy slows further before cutting interest rates, pledged last week it would do what it takes to support the euro.

The U.S. Federal Reserve took a similar wait-and-see approach o n W ednesday and did not announce any new stimulus measures to help revive a flagging U.S. recovery. Data on Fr iday is expected to show the U.S. economy added 100,000 jobs in July, not enough to lower an 8.2 percent jobless rate.

ECB President Mario Draghi "set us up like a poker room full of suckers," said Todd Schoenberger, managing principal at the BlackBay Group in New York. "We were all expecting a shock-and-awe moment."

The Dow Jones industrial average closed down 92.18 points, or 0.71 percent, at 12,878.88.

The Standard & Poor's 500 Index fell 10.14 points, or 0.74 percent, to 1,365.00.

The Nasdaq Composite Index fell 10.44 points, or 0.36 percent, to 2,909.77.

The euro, which had rallied above $1.24, beat a quick retreat to $1.2132 for its biggest one-day move in a year. It last changed hands at $1.2178, down 0.4 percent.

Safe-haven U.S. Treasuries rose, with the benchmark 10-year note up 12/32 to yield 1.48 percent, while Spanish and Italian bond yields rose and European shares fell.

The FTSEurofirst 300 index closed 1.2 percent lower and the MSCI world stock index lost 1.0 percent.

Spanish and Italian stocks were hit especially hard, with indexes falling around 5 percent each.

Reuters reported on Monday that the ECB was considering re-activating its Securities Markets Programme to buy Spanish bonds in tandem with the euro zone's rescue funds, but that action could be at least five weeks away.

"Draghi put himself in such a difficult position," said Joshua Raymond, chief market strategist at City Index. "There has been a swift change in the rhetoric from 'we will' last week to 'we may' today.

Brent crude oil settled 6 cents lower at $105.90 a barrel, while U.S. crude fell in tandem with stocks and other growth-sensitive assets to settle down $1.78 at $87.13.

Spot gold fell $10.25 to $1,588.30

LAYING THE GROUNDWORK

Since Draghi surprised markets last week with a promise to save the euro, European shares had rallied by as much as 5 percent, the euro has risen about a cent against the dollar and yields on Italian and Spanish debt had fallen sharply.

Some, though, said the ECB president made clear that policymakers are serious about helping indebted countries such as Spain and Italy and stopping the crisis from worsening.

"What he said was pretty significant. He seems to have laid the groundwork for substantial policy action," said Andrew Wilkinson, chief economic strategist at Miller, Tabak & Co. "It wouldn't surprise me if we get a risk rally in the days ahead."

Stephen Jen, managing partner at SLJ Macro Partners, said the market expected too much.

"The market demanded short-term fixes. I think this reflects how the markets have been conditioned by the Fed's repeated (stimulus) operations. Investors have now been reminded that there are no quick fixes for the problems in Europe."

The Fed has been much quicker than its euro zone counterpart to pump money into the financial system. It has already bought assets to the tune of $2.3 trillion and pledged to keep interest rates at zero until at least late 2014.

Though it stood pat this week, it said it was ready to act if necessary. Investors expect it could launch another round of bond purchases as soon as September.

The U.S. economy lost momentum in the second quarter as the pace of hiring slowed and consumer confidence weakened.

Data Thursday showed the number of Americans filing initial claims for unemployment benefits rose slightly in the latest week, though less than economists had expected. - Reuters

Friday afternoon Reuters reported from Tokyo:

Asian shares and the euro fell on Friday as investors shunned risk after the European Central Bank took no immediate action and only hinted at future steps to tackle the euro zone's fiscal woes, following similar inaction from the U.S. Federal Reserve.

Investors also have reasons to be more cautious ahead of a key U.S. non-farm payrolls data for July due at 1230 GMT, with job creation below the 100,000 forecast likely to boost hopes the Fed, which on Wednesday stood pat with its current monetary policy, would embark on further easing as early as next month.

MSCI's broadest index of Asia-Pacific shares outside Japan slipped 1 percent after global stocks tumbled on Thursday, but was set for a weekly gain of about 1 percent.

The index's materials sector slumped nearly 2 percent as miners dragged Australian shares lower to rank among the worst performers in Asia with a 1 percent drop.

"One would expect the risk-off adjustment would likely be involved in the selling of stocks such as miners, whose revenue strengths are more vulnerable to on-going problems in Europe, and the retrenchment of world confidence and so forth," said Ric Spooner, market strategist at CMC Markets, of Australian stocks.

Japan's Nikkei stock average slid 1.6 percent, hit by heavy quarterly losses and cuts to the full-year earnings outlook from Sharp Corp and Sony Corp.

Expectations for bold actions had run high after ECB President Mario Draghi on Thursday last week vowed to do whatever it takes to preserve the euro.

The ECB, after keeping interest rates steady, indicated it may resume buying government bonds to drive down surging Spanish and Italian borrowing costs, but passed the baton back to euro zone governments by saying they must act first.

But Draghi said the ECB would consider other "non-standard" measures, hinting at quantitative easing, and by noting signs of an economic recession spreading across the continent left the door open for future rate cuts.

"It was obviously disappointing not to get outright buying of bonds by the Fed and ECB, but it seems they will come and in the case of the ECB, could be unlimited," said Chris Weston, a dealer at IG Markets in Melbourne.

CENTRAL BANKS NOT ALMIGHTY

The euro hit all-time lows against the Australian and New Zealand dollars in early Asian trade around A$1.1600 and NZ$1.4980 respectively.

The single currency fell 0.1 percent against the U.S. dollar to $1.2170, not far from a one-week low of $1.21335 touched after investors digested the ECB's news on Thursday.

"Draghi kept hopes that the ECB will do what it can within the framework of a central bank and that is positive," said Kazuto Uchida, an executive officer and general manager of the global markets division at the Bank of Tokyo-Mitsubishi UFJ.

"But concurrently, markets were reminded of the limit to what the central bank can do for Europe's fiscal crisis. There is now risk of repercussions to having an excessive belief that monetary policy or central banks are 'almighty'."

Uchida said that the Fed, in contrast, has managed market expectations better to keep relative stability by pricing in further easing stimulus.

While European shares fell on Thursday, euro zone bank shares and Spanish stocks were still up following Draghi's pledge last week, while Europe's volatility index fell 6 percent on Thursday, signalling investors are still willing to take risk.

Risk aversion may also be tamed somewhat as data on Thursday showed the number of Americans filing new claims for jobless benefits rose last week and manufacturers suffered an unexpected drop in orders in June, suggesting the economy is struggling to break out of a soft patch and needs more monetary stimulus.

The Fed said at this week's meeting that it is prepared to act if the economy deteriorates further, and economists say the U.S. central bank is buying time to lay the groundwork for further monetary easing, possibly at its Sept. 12-13 gathering.

Brent crude added 0.4 percent at $106.30 a barrel while U.S. crude futures rose 0.4 percent to $87.50.

Data on Friday showed activity in China's services industry slowed in July from June, but still fared far better than the factory sector, with the official purchasing managers' index falling to 55.6 from 56.7 and staying above a 50 reading which signals expansion.

Market jitters unsettled Asian credit markets, sending the spread on the iTraxx Asia ex-Japan investment-grade index wider by 4 basis points. - Reuters

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