Europe rally fails to cross the pond

Europe’s big stock and bond rally on Thursday failed to carry over to the U.S., where prices of both asset classes fell.

U.S. stock prices were initially higher after the European Central Bank announced a new asset purchase program and another interest rate cut but then drifted lower after peaking at mid-morning. The S&P 500, higher by as much as 0.5%, ended with a 0.2% loss, as did the NASDAQ. The Dow closed down 0.1%. The Treasury’s 10-year note fell nearly ½ point in price to raise its yield five basis points to 2.45%, its highest closing level in three weeks.

The ECB, as expected, announced a new asset purchase program and, unexpectedly, reduced interest rates even further. First, the bank cut its refinancing rate by 10 basis points to 0.05% and its deposit rate to -0.2% from -0.1%. Then, at his post meeting press conference, ECB president Mario Draghi announced a new program, to begin next month, in which the central bank will purchase asset-backed securities and covered bonds issued by eurozone banks. Details will be provided after the ECB’s Oct. 2 meeting. “Most, if not all, of the data we got in August on GDP and inflation showed that the recovery was losing momentum,” Draghi said in discussing the rationale for the program, which he said, “will have a sizable impact on our balance sheet.” He added that the bank was now “at the lower bound” when it comes to cutting interest rates any further.

European stocks and bonds, which have rallied since Draghi hinted at the plan at the Jackson Hole meeting two weeks ago, rose even higher, while the euro plunged. The Stoxx Europe 600 jumped 1.1% as Spanish and Italian stocks both climbed 2% or more while Germany’s DAX index rose 1%. Yields on 10-year Italian and Spanish government bonds dropped 11 basis points each, the Italian security falling to 2.35%, some 10 bps below comparable U.S. Treasury notes. The Spanish bond dropped to 2.18%. But investors took profits on German bunds, the 10-year yield rising about two bps to 0.97%. In currency trading, the euro plunged more than 1.5% to below $1.30, its lowest level in more than a year. Reducing the strength of the euro has been one of the ECB’s main goals; the euro has now dropped more than 10 cents, or about 7%, against the dollar since early May.

In the U.S., job sector numbers reported Thursday were slightly weaker than expected going into Friday’s August Labor Department report, while the ISM’s services sector index was much better than expected. The ISM’s non-manufacturing index rose nearly a full point to 59.6, its highest level in nine years and more than two points higher than the Street forecast, which was actually looking for a slight decline. The manufacturing index, released on Tuesday, also rose sharply from the previous month. But jobs numbers were a bit disappointing. The ADP national employment report said private companies added only 204,000 jobs last month, the lowest figure since last March and well below Street expectations of 223,000. New unemployment claims rose by 4,000 last week to 302,000. Tomorrow’s government report is expected to show an increase in nonfarm payrolls by 230,000, up from 209,000 in July, and for the unemployment rate to fall to 6.1% from 6.2%.

Reports/dates/facts/links worth paying attention to over the next week:

  1. September 5: Labor Department report on unemployment and payrolls (August).
  2. September 9: U.S. JOLTS Job Openings report (July); same store sales latest week.
  3. September 10: U.S. wholesale trade (July).
  4. September 11: U.S. weekly jobless claims; U.S. Treasury monthly statement (August).

Copyright © 2014 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.

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