What to Expect and Potential Euro Exchange Rate Reactions — ECB Ahead

USA stocks rose to fresh records Friday, capping their best week since the presidential election.

“The reduction in purchases initially came as a surprise to the market as we first thought it was policy tapering”, saidAyako Sera, market economist at Sumitomo Mitsui Trust Bank inTokyo.

Dow Jones closed up by 0.24 percent, S&P 500 ended up by 0.58 percent, Nasdaq finished the day up by 1.00 percent.

Banks elsewhere around the world also gained during the week.

A decision to extend the stimulus program is facilitated somewhat by a global rise in bond yields following Trump’s victory that makes more bonds available for the European Central Bank to purchase. That keeps bond prices up and holds down interest yields, which move opposite to prices. From next year, it will buy bonds with yields below the central bank’s -0.4% deposit rate, and bonds with maturities down to a minimum of one year (it used to be two years).

QE works by pumping freshly created money into the banking system in the hope of bolstering activity, prices and employment – all remaining in the doldrums since the financial crisis.

The euro tumbled with bonds as Mario Draghi signalled he stood ready to add to stimulus if a proposed reduction in the current level of asset purchases fails to shore up the economy.

Their big dividends are attractive to investors who want income, so when bond yields fall, investors often turn to those stocks.

The Dax 30 rose 0.4% to 11,033, trading around its highest level this year while the CAC 40 picked up 0.1% at 4,698.

Interest rate futures FFZ6, FFM7 implied traders saw a 98 percent chance the USA central bank would raise interest rates by a quarter point next week, and about a 50 percent chance it would raise rates by at least another quarter point by June 2017, according to CME Group’s FedWatch program.

The euro initially surged after the European Central Bank decision, but it quickly fell back and extended falls during Draghi’s news conference to trade as much as 1 percent down on the day at $1.0630. The West Texas Intermediate (WTI) contract for U.S. crude futures fell 1% to $50.41 a barrel. Machinery makers and railroad companies also traded lower. Oreo maker Mondelez fell 65 cents, or 1.5 percent, to $41.29 and Kraft Heinz gave up 90 cents, or 1.1 percent, to $82.05.

Brent crude settled at $54.94 a barrel, up 48 cents – or 0.88 percent – before retreating to $54.22 a barrel.

The health of Italian banks is particularly relevant to EWI because the ETF allocates 29.6 percent of its weight to those stocks, or 540 basis points more than its weight to energy, its second-largest sector exposure.

Economist Carsten Brzeski at ING-DiBa said the European Central Bank risked getting a negative reaction in markets by sending the impression it was focused on reducing the rate of stimulus rather than increasing it. It traded at an all-time high of nearly $170 this summer.

CURRENCIES: The dollar slipped to 113.64 yen from 114.05 yen. The euro rose to $1.0752 from $1.0715.

But then, nearly as quickly, traders had a change of heart. Natural gas jumped 9 cents, or 2.6 percent, to $3.70 per 1,000 cubic feet.

METALS: Gold lost $5.10 to $1,172.40 an ounce. Silver fell 18 cents to $17.10 an ounce. Copper slid 2 cents to $2.63 a pound.

In all, Europe’s STOXX 600 was up 0.6 percent. The U.S. dollar weakened against the yen on Monday as the greenback weakened as investors viewed recent dollar strength as overdone.