Global Market Overview

Last updated: November 7, 2013 9:09 pm

Euro slides and stocks jump as ECB cuts

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Thursday 2100 GMT. Global stocks declined as a report showing better than expected economic growth offset a move by the European Central Bank to cut borrowing costs.

The dollar was also in demand but gold got battered following stronger than expected growth for the US economy in the third quarter.

The eurozone’s monetary guardian cut its main rate by 25 basis points to a record low of 0.25 per cent in an attempt to bolster the bloc’s economic recovery and challenge disinflationary pressures after data showed that price growth had fallen to 0.7 per cent in October.

“Although the timing of the move is a surprise, the case for a rate reduction was overwhelming in our view,” said Nick Kounis, head of macro research at ABN Amro.

“Inflation is already well below the ECB’s price stability goal . . . The economy is recovering, but only slowly following a long period of weakness when substantial economic slack has built up.”

Traders’ risk appetite was initially boosted by the ECB news. But earlier gains fizzled and stocks fell after a report showed gross domestic product in the US rose at a 2.8 per cent annualised rate in the third quarter, above Wall Street’s estimates for a 2 per cent advance.

The FTSE All World index closed 0.9 per cent lower as the S&P 500 fell 1.3 per cent to 1,747, in spite of strong gains for Twitter in its first trading day.

GDP “not only beat expectations but proved to be the highest quarterly increase in a year”, said Steven Ricchiuto, chief economist at Mizuho Securities USA.

“The gain, however, was dependent on a spike in inventory which added 0.8 per cent to the headline number. Excluding inventory, the gain was 2 per cent or basically unchanged from the last five quarters.”

Still, the US GDP report weighed on US equities and kept a lid on Treasuries gains because some investors reckoned it may bring forward the timeline for when the US Federal Reserve starts tapering its $85bn-a-month monetary stimulus.

The 10-year Treasury yield, which hit a low of 2.60 just after the ECB news, fell 2 basis points to 2.61 per cent.

Money also moved into European sovereign fixed income, particularly at the short end, which is most affected by monetary policy.

The German 10-year yield fell 5bp to 1.70 per cent and the two-year note slipped 6bp to 0.08 per cent.

Lower rates hurt the euro, however. The common currency dropped sharply on the announcement and traded down 1 per cent at $1.3391, its lowest since mid-September.

The dollar index, which at the end of October fell to an eight-month low of 79.0 after some weak data convinced traders the Fed would stay “looser for longer”, rose 0.9 per cent.

The US currency also benefited from a decline for sterling, which fell 0.3 per cent to $1.6030 after the Bank of England left policy unchanged.

But a stronger greenback hurt gold prices and the bullion tumbled $11 to $1,307 an ounce. Industrial commodities were mixed with copper up 0.1 per cent to $3.24 a pound and Brent crude down $1.17 to $104.07 as high inventory levels weighed.

Dollar-watchers will turn their attention to a more up-to-date economic gauge, the non-farm payrolls report, due for release on Friday.

A net 125,000 jobs are expected to have been created in October and the unemployment rate is seen nudging up to 7.3 per cent, according to analyst forecasts compiled by Reuters.

Earlier on Thursday, Asian markets continued to show nervousness ahead of the weekend’s meeting of China’s Communist party hierarchy.

Discussions are likely to include potential economic reforms, which some investors fear could curb the flow of credit and burst the nation’s property bubble, leading to slower growth.

The Shanghai Composite index shed 0.5 per cent and Hong Kong’s Hang Seng traded 0.7 per cent lower as financial and consumer stocks led the declines.

Tokyo’s Nikkei 225 lost 0.8 per cent and Sydney’s S&P/ASX 200 fell 0.2 per cent, the latter following news that Australia’s unemployment rate held steady at 5.7 per cent, while employers added only 1,100 jobs in October – well below economists’ consensus expectations of 10,000 new positions.

The Australian dollar was lower against its US counterpart, falling 0.6 per cent to US$0.9468 as traders speculate that the jobs report makes the Reserve Bank of Australia less likely to raise the interest rate from 2.5 per cent.

Reporting by Jamie Chisholm in London and Naomi Rovnick in Hong Kong

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