Dovish signs contained within the minutes from the September FOMC meeting sparked a rebound in the US stock market yesterday.
By Peter Martin
Thursday, October 9, 2014
But the advance in share prices proved to be temporary, with the major benchmarks resuming their slide in value on Thursday, despite encouraging economic data on the domestic front.
By mid-afternoon in New York, the Dow Jones Industrial Average was down 268 points or 1.58% at 16,725, with losses suffered by all 30 components of the blue-chip index, while the S&P 500 was off by an even larger amount, slumping 1.87% to 1932.8.
That means the S&P 500 is down around 4.3% from its highs. Though this is a substantial correction, we remain well off what would normally be considered bear market territory.
The declines today have been driven by worries arising from the situation in Europe, where growth appears to be slowing and inflation remains depressed, despite the efforts of the European Central Bank. With the Fed looking on course to end its stimulus soon, the fear is that deterioration in economic conditions in the euro area could damage the US recovery at this crucial time.
Comments from ECB president Mario Draghi today have highlighted the problems facing the eurozone. In a speech in Washington, Mr Draghi warned that problems facing Europe were not just cyclical but structural. He said that the ECB was ‘accountable to the European people for delivering price stability, which today means lifting inflation from its excessively low level’ and added that ‘we are ready to alter the size and/or the composition of our unconventional interventions, and therefore of our balance sheet, as required.’
The ‘risk-off’ sentiment that has dominated proceedings today has benefitted the dollar and the yen, both currencies strengthening against most major currencies. EUR/USD slipped 0.38% to 1.2685, while USD/CAD rose 0.5% to 1.1165. USD/JPY fell 0.28% to 107.78.
The dollar was also boosted by improvements in the labor market. Initial jobless claims dropped 1000 last week to 287,000, beating the consensus estimate of 293,000, while the four-week moving average fell 7250 to 287,750, a new post-recession low, which will likely bolster hopes for this month’s employment report.
The Bank of England announced no change as the outcome of the October meeting of its Monetary Policy Committee. With no signs of UK inflationary pressures increasing leading up to the meeting, the decision to maintain the UK Bank Rate at 0.5% and its asset purchases at £375 billion was widely expected. The minutes from the meeting will be released on October 22. GBP/USD was down 0.32% at 1.6119 by mid-afternoon in New York.
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