Central Bankers Talk, Global Stocks Drop
ECB President Mario Draghi announced a balanced package of measures Thursday designed to continue Europe’s slow rise from recession. The stock selloff which ensued did not seem to bother him and shouldn't bother investors, either.
By Vikram Rangala
Thursday, December 3, 2015
The ECB Governing Council reduced its deposit rate by 10 basis points to minus 0.3 percent. To offset the rate cut with direct investment, Draghi also announced a continuation of quantitative easing until at least March 2017. The bond buyback program of 60 billion euros a month will broaden the assets purchased to include local and regional debt.
While the measures are substantive and multifaceted, continuing programs that have largely gained approval, investors immediately signaled their disappointment. European stocks tumbled, as did government bonds. The Stoxx Europe 600 Index plunged the most in three months and the DAX lost roughly 3.5%.
Meanwhile the euro currency rallied from a seven-month low against a dollar weakened in part by signals from Fed Chair Janet Yellen that the US is ready for a rate hike in December. Those comments from Chair Yellen had a similar effect on US markets, which continued their overnight drop into the afternoon.
In her testimony to Congress, Yellen expressed overall optimism about the economy, particularly the labor market. While inflation in the US remains low, she expressed confidence that it would continue its slow trickle upward to the Fed’s target minimum of 2.0%.
Her remarks were virtually identical to those made Wednesday and extended language she used last week. The Federal Open Market Committee meets December 15-16. The Fed has kept interest rates low since 2008, through three cycles of quantitative easing, following the worst financial crisis since the Great Depression. During that time, unemployment has dropped in half and the S&P 500 has more than tripled.
The weak dollar helped crude oil and other energy commodities end a week-long decline ahead of a meeting of the Organization of Petroleum Exporting Countries. OPEC leader Saudi Arabia has continued its strategy of near-maximum production, even as the world experiences an ongoing oil glut. Smaller oil producers, who are hurt by low oil prices, are pressing the Saudis to cut their output and help push prices higher. The Saudi response has essentially been, “You first.”
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