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Draghi comments offer support to euro

Thursday 19:15 GMT


Mario Draghi helped support the euro and fuel a sell-off for German Bunds as mildly hawkish remarks from the European Central Bank president contrasted with the dovish tone of the ECB’s post-policy meeting statement.

On Wall Street, the S&P 500 struggled to snap a three-day run of losses as energy stocks fell sharply again as oil prices tumbled to three-month lows.

The underlying market mood was also cautious as participants awaited the release today of the February US employment report — which could heighten expectations that the Federal Reserve will aggressively raise interest rates in coming months.

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But it was the ECB that provided the main focus on Thursday as it kept its policy rates and plans for quantitative easing unchanged.

“The forward guidance was also the same as the statement following the January meeting,” noted Nick Kounis, head of macro research at ABN Amro.

“It maintains a dovish bias with ‘lower’ policy rates and an ‘increase’ of QE still options left on the table.”

In the subsequent press conference, however, Mr Draghi “did not forget to throw some bones to the hawks”, said Carsten Brzeski, economist at ING.

“He stressed that the ECB no longer had a sense of urgency of taking further actions and that no fresh targeted longer term refinancing operations [cheap loans to banks] had been discussed. Mr Draghi even dodged the question on whether the ECB might raise interest rates before the end of QE.

“This strategy is preparing the ground for a [QE] tapering announcement after the Dutch and French elections if growth and inflation follow their current paths, but keeps all options open if the current optimism turns out to be unjustified.”

The euro briefly pushed back above the $1.06 level against the dollar before easing back to $1.0585, still up 0.4 per cent on the day.

The single currency put in a stronger showing versus the broadly weaker yen, rising 0.9 per cent to a one-month high of ¥121.56 and was up 0.6 per cent against sterling at £0.8690.

Meanwhile, the yield on the 10-year German government bond — which moves inversely to its price — rose 5 basis points to 0.42 per cent, the highest close since the start of February.

But John Higgins at Capital Economics said the Bund sell-off was unlikely to build up a head of steam.

“Back in October, investors were expecting no change in ECB interest rates over the next few years. Now, though, they are pricing in a steady — albeit very slow — rise.

“The 20bp or so increase in the three-year eurozone overnight indexed swap (OIS) rate that has resulted from this reassessment has coincided with a 50bp-odd rise in the 10-year Bund yield.

“We remain sceptical, though, that any rise in ECB interest rates will happen before 2019, given the outlook for growth and core inflation.”

US Treasuries followed the lead set by Bunds with the yield on the 10-year note up 5bp at 2.61 per cent, and that on the two-year 3bp higher at 1.38 per cent and heading for its highest finish since August 2009.

Robust US private sector jobs data earlier this week sent many economists scrambling to raise their forecasts for Friday’s non-farm payrolls figures.

A strong report would add to expectations for US rate rise next week — a scenario already given a probability of 90 per cent by the futures market, according to CME Group.

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Brent oil was down another 2.7 per cent at $51.69 a barrel — and US West Texas Intermediate was below $49 a barrel for the first time since December — amid persistent concerns about record levels of US crude inventories.

It was revealed on Wednesday that US stockpiles had risen by 8.2m barrels — four times analysts’ forecasts.

Analysts highlighted that prices had stayed in very narrow ranges over the past few months. Indeed, moves had been so meagre that the CBOE Oil Vix, a measure of implied market volatility, hit a 30-month trough of less than 25 at the start of March.

Furthermore, net long positions in the oil market had been over-extended for some time.

“The longer that went on for, the more positioning stresses built up, explaining the sharp drop,” said analysts at Morgan Stanley.


The prospect of higher US borrowing costs helped financial stocks rally anew on Wall Street, although the dominant driver proved to be further oil-inspired weakness in the energy sector.

By mid-afternoon in New York, the S&P 500 equity index was down 0.2 per cent at 2,357, and 1.8 per cent below the record close set on the first day of this month.

Across the Atlantic, the pan-European Stoxx 600 index edged up 0.1 per cent but hefty losses for energy and mining stocks left the UK’s FTSE 100 down 0.3 per cent.

And energy stocks in Asia also fared badly. Australia’s S&P/ASX 200 lost 0.3 per cent as resources groups weighed, and the same dynamic was a feature of a 1.2 per cent drop for Hong Kong’s Hang Seng.

Tokyo’s Topix is relatively energy-light and so along with the sight of a weaker yen it outperformed with a 0.3 per cent advance, helped by gains in the IT and consumer discretionary segments.


The dollar’s moves were mixed. The yen was down 0.4 per cent to ¥114.82, near its weakest versus the greenback in five weeks.

Sterling was up 0.1 per cent at $1.2180 but hovering near seven-week lows, as investors reflected on the government’s budget statement and remain concerned by the potential economic fallout of Brexit.

Additional reporting by Hudson Lockett in Hong Kong

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