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The ECB Flinches and Markets Flail

The euro soared to a one month high in New York closing at 1.0941, up more than four big figures against the dollar. The day's 457 point range was the largest one day move since March 2009.  

The European Central Bank disappointed markets with its announcement of a 0.1 percent cut in the deposit facility rate, and an extension of its bond-buying program by six months to at least March 2017.  The currency had traded at a seven-month low of 1.0524 ahead of the bank meeting.

Last month European Central Bank President Mario Draghi had strongly hinted that more accommodative monetary policy was coming to the European Monetary Union.  In response to his perceived assertion at the October 22nd governing council meeting, the euro fell almost 250 points that day, beginning a six week decline that reached its perigee just before the 7:45 am (New York) announcement. 

Market expectations in advance of today meeting had leaned heavily toward a rate cut of 0.15 percent in the deposit rate and an increase in the amount of monthly bond purchase from €60 billion by at least €10 billion or more. ECB President Mario Draghi and other bank officials had repeatedly talked about the need for further stimulus in the Eurozone over the past several weeks.

Other markets reacted just as violently to the ECB policy decision.

 In Germany the Dax Index lost 400 points, 3.58 percent.  The yield on the German 10 year Bund jumped 20 basis point s to 0.666 percent. The 2 year Bund gained 13 basis points to -0.310 percent, its highest yield since November 9th. The CAC 40 in Paris lost 175.55 points also 3.58 percent and in London the FTSE shed 145.93 points, 2.27 percent.

The Dow suffered its worst one day loss since September 28th, giving up 252.01 points, closing at 177,477.67.  The Nasdaq Composite tumbled 85.695 points to 5,037.527 and the S&P 500 plunged 29.89 points to 2,049.62. 

American credit market yields moved sharply higher. The generic 10 year Treasury rose 13 basis point to 2.3136 percent.  The two year yield, which had been as high as 0.9863 percent, ended the day at 0.9505 just 0.016 points ahead. 

The Federal Reserve still appears to be on course to raise the Fed Funds rate at its meeting on the 16th of this month for the first time in almost a decade.

There is however, sufficient doubt in the market, the Fed backed off from an identical increase at the last FOMC meeting, so that when and if the increase comes, it should weaken the euro. Though some of the concerns about China and the international economic situation have eased in recent weeks, the Fed will still need to prove its intent is as good as it word.  

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

 

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