Stocks retreated with government bonds, while the euro rallied to the highest level in almost a month as investors looked past an unprecedented boost to European stimulus to focus on rising anxiety that central banks have lost the ability to boost global growth and stave off deflation.
European shares plunged 4% from the highs of the session as President Mario Draghi's signal that further interest-rate cuts aren't likely damped enthusiasm after the ECB cut three key interest rates and increased its bond-buying program. U.S. stocks fluctuated, with energy shares leading declines as crude oil fell below $37.50 in New York, providing a reminder that commodity prices remain at levels inconsistent with rising inflation. Treasuries fell, pushing yields to the highest in more than a month.
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Financial markets took less than 90 minutes to go from being overwhelmed by the extent of the ECB's measures to being underwhelmed by Mr. Draghi's signal that policy makers have done all they deem necessary to revive growth in the region. While Mr. Draghi delivered more than anticipated, investors have grown skeptical of policy efficacy after years of stimulus from Asia to America has delivered only anemic global expansion.
“Draghi basically said 'that's it,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “He indicated no further rate cuts. I don't understand them anymore. It would have been sensible to keep the expectation that they can do more. on the interest rate side, he just destroyed this expectation without need.”
STOCKS
The Standard & Poor's 500 Index fell 0.4% at 12 p.m. in New York, falling from near a two-month high. The Stoxx Europe 600 lost 1.5% in a turnaround that wiped 4% after the initial ECB euphoria.
Speculation for additional moves from the ECB to boost growth, along with stability in oil prices and improving U.S. data have helped global equities rebound during the prior three weeks. The S&P 500 had advanced 9% and the Stoxx 600 had rallied 12% from February lows.
“Over the last few weeks, there's been a bit more optimism that the ECB would deliver easier money, and that's what the markets got today,” said Kevin Caron, a market strategist and portfolio manager who helps oversee $170 billion at
Stifel Nicolaus & Co. in Florham Park, New Jersey. “But to an extent it was already expected. The market usually does a pretty good job in terms of anticipating things, and that's why you might not be seeing as much follow-through.”
Comments from the Federal Reserve next week may give investors cues on the the path of interest rates. Fed officials have stressed that the pace of rate increases, following December's first hike since 2006, will be gradual and data-dependent.
“The reason U.S. equities aren't ripping is because people realize it's going to strengthen the U.S. dollar over the long term, which is even worse for U.S. earnings that are bad already,” Peter Cecchini, co-head of equities and chief market strategist at Cantor Fitzgerald, said by phone. “The euro zone isn't great and that's part of the reason why Draghi has done what he's done. The underlying fundamentals that caused him to do this are not good.”
