Global Markets View: European shares sink as Draghi disappoints rate-cut bulls

ECB prepares some sub-zero relief for wilting Europe

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SINGAPORE/LONDON/NEW YORK

European stock markets turned into a seaof red on Thursday after the European Central Bank signalled monetary policy easing ahead, but disappointed investors who sought more clarity on its action to stimulate a slowing economy.

Investors initially cheered the ECB’s policy statement, which said the central bank saw rates at present or lower levels through mid-2020 and was considering other easing options,lifting the pan-European STOXX 600 index .STOXX to its highest level in more than a year.

However, the gains soon evaporated and the index tumbled more than 0.5% after ECB chief Mario Draghi said the risk of are cession in the euro zone was “pretty low”, policymakers didnot discuss interest rate cuts at Thursday’s meeting and they would wait for more data before “taking action.”

“He made it clear that these things presented in the statement are options and not necessarily forthcoming, so thatwas a bit of a disappointment for markets,” said Rabobank strategist Bas Van Geffen. “He wasn’t as vocal with what the next steps would be at the central bank.

Expectations of easier monetary policy have spurred a rally in stocks globally since steep falls in May, but analysts war nit may now be difficult with expectations for interest rate cuts from the ECB and the U.S. Federal Reserve already priced in.

“The danger is that investors have become too complacent, relying fully on accommodative monetary policy, and ignoring the late-cycle risks that are lingering in the background,” said Wolfgang Bauer, fixed income manager at M&G Investments.

German shares .GDAXI suffered the biggest blow, falling1.3%. A survey showed Germany’s business morale plunged in June, stoking fears a manufacturing crisis is pulling Europe’s largest economy towards recession.

Car parts maker Hella HLE.DE , down about 6%, emerged as the latest company to warn of a deteriorating environment in the sector, with weak results from US automaker Ford Motor CoF.N and Japan’s Nissan Motor Co7201.T adding to woes.

Banks .SX7P ended 0.2% lower after shooting up earlier in the day on news the ECB discussed tiered deposit rates, which would mean banks are exempted in part from paying the ECB’s 0.4%annual charge on their excess reserves, boosting their profits.

Helping limit losses on Britain’s FTSE 100 .FTSE was a7.7% jump in drug maker AstraZeneca Plc’sAZN.L shares after itraised its product sales forecast for 2019. Europe’s health care index .SXDP was among the few sectors trading higher.

Other gainers included shares of the world’s largest brewer Anheuser-Busch InBev ABI.BR , up 4.3%, after reporting the fastest beer sales growth in five years and defence and aerospace group Cobham COB.L , which topped the STOXX 600 with a 35% surge after U.S. private equity group Advent International agreed to buy it for 4 billion pounds ($5 billion).

The euro and bond yields wilted in a sweltering Europe on Thursday as the European Central Bank signalled it was ready for even deeper sub-zero interest rates and to restart its mass bond buying programme. The bank didn’t take any steps on the day but its easing intentions were clear. It left the euro at a two-month trough , sent German Bund yields back to record lows and nudged Europe’s main stock markets higher.

Traders were waiting for Mario Draghi’s 1230 GMT news conference but German data had earlier added to the call for ECB action after it showed business morale in the bloc’s largest economy had hit its lowest since April 2013. The ripple effect saw bond yields bow across Europe. As well as the Bund yield slide, neighbouring Switzerland’s 50-year government bond yield even went negative, meaning that none of its debt now offers buyers any interest. The ECB is clearly preparing for a package of policy easing in September, said analysts at TD Securities, We look for a dovish press conference now.

Wall Street was also expected to open higher amid another blizzard of earnings. The S&P 500 and Nasdaq had both hit record highs on Wednesday after reassuring comments from Texas Instruments about global chip demand blunted the impact of weak earnings from Boeing and Caterpillar. Facebook share were also up around 1% in pre-market trading after it announced forecast-beating revenues after Wednesday’s closing bell.

The social media company’s stock has surged over 56% so far this year, despite warnings on future revenue growth from new data privacy rules and forthcoming privacy-focused product changes. Asia then managed to overcome some early wobbles to finish higher and with some striking milestones. Japan’s Nikkei touched a near three-month high, although Australia stole the glory as it ended near a 12-year peak after its central bank chief stressed interest rates could continue to fall.

Chinese blue-chips also added 0.5% in Shanghai. Investors there looked with hope to a meeting between top US and Chinese negotiators next week, even if there are few signs that it will produce real progress in the two countries’ trade war. Lower rates are generally, in a traditional, mechanical way, good news for equity prices, said Jim McCafferty, head of equity research, Asia ex-Japan, at Nomura.

For all the ECB focus, the day’s fireworks had already gone off in Turkey. The country slashed its main interest rate to 19.75% from 24% in the first rate meeting since President Tayyip Erdogan sacked the former central bank chief for not cutting rates fast or furiously enough.

 

New governor Murat Uysal didn’t waste any time and the lira rose 0.3% in response.

The CBRT (Turkish central bank) had room for manoueuvre given real rates are at 8%, and decided to front-load some of its expected easing, said Standard Chartered economist Carla Slim.

It likely deemed the global market and geopolitical backdrop benign enough to give more weight to domestic issues. The risk is that cutting too much too soon could unnerve markets.”

 

Back among the major currencies, the dollar was down against the yen at 108.07 and the dollar index, which tracks it against six major currencies, barely budged at 97.757.

 

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