This afternoon’s press conference and Q&A session following it, sent shockwaves through financial markets as ECB President made a series of extremely Dovish comments. Many analysts predicted the Italian would use this occasion as an opportunity to engage in monetary jawboning, but even the most Dovish observers would’ve been left surprised at the levels of rhetoric used.
These comments sent the shared currency tumbling, experiencing a very sharp sell off almost as soon as the first Dovish chord was struck:
Draghi began his speech by stating that “downside risks to growth and inflation” were still apparent and the the ECB would “re-examine the level of accommodation” at it’s next meeting on December 3rd. These comments triggered initial selling in the EUR, but what was said next was perhaps the most Dovish of all. Draghi commented that the ECB was “willing and able to act” at the December meeting and would consider “using all available tools”.
He then followed this up in a similarly Dovish manner in the Q&A by saying “it’s not wait and see, it’s work and assess” before mentioning that a further cut in the deposit rate was discussed at this meeting.
This was widely unexpected as many analysts believed he wouldn’t mention further rate reductions due to previously stating that they had reached a lower bound.
Any further movement in the minimum bid rate (0.05%) or the overnight deposit rate (0.2%) was widely considered off the table, after Draghi previously stated that they had reached their lower bound. The mention of a potential cut in the depo rate was especially important as it currently prohibits the ECB from buying 2- year German bonds as their yield is below it (-0.26%.) blocking the purchase of this asset in it’s QE programme.
The effect on EURUSD, DAX and general indexes was huge.
Boosted by this event, stocks enjoyed stellar gains across the board with the Dax (+2.57%) ending the European session at 10500, a gain of 262 ticks today. The Eurostoxx 50 (+2.65%) enjoyed similar gains whilst the FTSE (+0.59%) lagged somewhat despite closing green. The US was boosted by better than expected earnings out of Mcdonalds and Ebay, strong US data and a wave of positive sentiment from the news out of Europe. In addition, The S&P 500 (+1.35%), DJIA (+1.27%) and Nasdaq (+1.37%) all are on pace to post impressive gains.
Following on from the prevailing theme, the largest mover in G10 currencies today was the Euro recording big losses against all it major crosses. EURUSD (-1.60%) was 182 pips lower whilst EURGBP (-1.61%) was also under increased selling pressure due to stronger than expected UK data. The NZDUSD (+1.18%) once again conspired to wrong foot traders as it reacted positively to strong US data, showing impressive daily gains.
The commodity space failed to match the volatility seen if other asset classes, with small gains noted in Brent (+0.59%) and WTI (+0.58%). Gold (+0.04%) was pretty much flat on the day as Europe rang the closing bell trading at $1167.6/OZ.