ECB cuts interest rate, to unveil more stimulus for eurozone

The package announced earlier by ECB President Mario Draghi fell short of expectations and investors were in unforgiving mood. The Standard and Poor’s 500 index fell 29.89 points, or 1.4%, to 2,049.62 and the Nasdaq composite fell 85.70 points, or 1.7%, to 5,037.53.

The kiwi rose to 66.84 U.S. cents at 5pm in Wellington from 65.30 cents on Friday in NY last week. The ECB purchases the bonds with newly created money, a step aimed at increasing the amount of money circulating in the economy. But unemployment is falling and some economic indicators are pointing up. It had fallen to a 7-1/2 month low of $1.0523 on Thursday before jumping to as high as $1.0981 after the ECB’s measures were announced. So a lot of investors overbought bonds on expectations that Draghi would over-deliver.

“Draghi caused a great deal of disappointment, dislocation and pain”, said Jeremy Stretch, head of currency strategy at CIBC World Markets.

The euro is strengthening against the dollar by +3%, versus the British currency by +2% and against the Japanese currency jumping more than +2.5%!

Oil investors will be closely watching Friday’s meeting of the Organization of the Petroleum Exporting Countries for any signs that OPEC is considering a daily production cut in the face of a supply gut.

European shares saw their biggest one-day drop in more than three months.

When it had been expected to slash interest rates and ramp up its Quantitative Easing programme, the European Central Bank instead merely trimmed its already-negative deposit rates while extending the duration, but not the size of QE. “People were looking for a bigger cut in rates out of the European Central Bank and they didn’t get it”. The yield on the 10-year German government bond soared 0.20 percentage points to 0.67%, a massive move in the bond market. The yield on Germany’s two-year note shot up to around minus 0.3% Thursday, climbing from historic lows in the minus-0.4% range.

ENERGY: Benchmark U.S. crude was up 17 cents to $41.24 a barrel in electronic trading on the New York Mercantile Exchange. Meanwhile, the yield on the 10-year Treasury spiked 13 basis points to 2.31%, near its highest level since July.

Dropping interest rates comes in marked contrast to the strategy being pursued by the U.S. Federal Reserve, which is soon expected to raise interest rates as the American economy chugs forward. Fed chair Janet Yellen yesterday stoked expectations the bank will hike following its December 15-16 meeting, citing an improving labour market and the outlook for inflation.

“This brings us to today’s USA employment report for November”. It has lost more than 14 per cent since the start of 2015. Brent crude, which is used to set prices for worldwide oils, climbed 4 cents to $43.88 a barrel in London.

Some analysts had been expecting more measures as inflation remains stubbornly below the ECB’s target of just under 2%.