Euro sign in front of the European Central Bank building in Frankfurt, Germany. Picture: ISTOCK
Euro sign in front of the European Central Bank building in Frankfurt, Germany. Picture: ISTOCK

New York — European stocks jumped more than 1% on Thursday, while the euro cratered against the dollar, after the European Central Bank (ECB) indicated it would not raise interest rates through the summer of 2019.

The bank’s unexpectedly dovish guidance on interest rates overshadowed its statement that it aimed to wrap up its crisis-era stimulus programme, quantitative easing, at the end of this year.

The ECB now plans to reduce monthly asset purchases between October and December to €15bn until the end of 2018 and then conclude the programme, though ECB president Mario Draghi stressed that the governing council stood ready "to adjust all its instruments as appropriate". Investors, though, seized on comments indicating that interest rates would stay at record lows at least through the summer of 2019.

Some analysts believe it could be even longer. "With Draghi’s term of office due to expire at the end of October 2019, we feel the ECB is unlikely to start increasing interest rates until the new ECB president is firmly in place," said David Zahn, head of European fixed income for Franklin Templeton.

Ten-year government bond yields in Germany, the eurozone benchmark, fell around four basis points to 0.43%.

The euro, meanwhile, touched on its steepest one-day drop against the dollar since June of 2016, while the dollar accelerated to a two-week peak. The euro was last down 1.37% to $1.1628, while the dollar index, which measures the greenback against six top currencies, rose 0.85%.

Equities strong

European equities rose sharply after initial losses, with Wall Street creeping into positive territory. The pan-European FTSEurofirst 300 index rose 1.4%, buoyed by big gains in interest rate-sensitive sectors like autos and utilities.

"The hawks had been guiding for a June hike before the meeting and, given the clear guidance the ECB gave today on interest rates, it had to be priced out," said AFS Group analyst Arne Petimezas. "It doesn’t seem like we’re at the stage where the hawks are on top of things."

MSCI’s gauge of stocks across the globe shed 0.05%, while Wall Street wavered, with two of the three main indices up after better-than-expected May retail sales data. The US commerce department reported that retail sales rose 0.8% last month, the biggest advance since November 2017.

Data for April was also revised upward.

The Dow Jones Industrial Average fell 7.94 points, or 0.03%, to 25,193.26, the S&P 500 gained 7.6 points, or 0.27%, to 2,783.23, and the Nasdaq Composite added 62.69 points, or 0.81%, to 7,758.39.

MSCI’s broadest index of Asia-Pacific shares outside Japan closed 1.11% lower, while Japan’s Nikkei lost 0.99%. Benchmark 10-year US treasury notes last rose 8/32 in price to yield 2.9516%, from 2.979% late on Wednesday.

The 30-year bond last rose 21/32 in price to yield 3.0696%, from 3.102% on Wednesday.

Trade tensions

One issue keeping investors in check was concern about US threats to impose tariffs on $50bn of Chinese goods. US President Donald Trump was planning to meet with trade advisers later to decide whether to activate the tariffs, a senior administration official said on Wednesday.

Chicago Board of Trade (CBOT) corn and soybean futures were down sharply as uncertainty about tariffs and favourable crop weather in the US Midwest have prompted funds to liquidate big long positions.

CBOT July corn fell to its lowest since mid-January and front-month soybeans dipped to a nine-and-a-half-month low. Traders are worried about China, Mexico and other countries curbing demand for US grain and soy exports.

Another event markets were gearing up for — the start of the Fifa World Cup in Russia, where time zone differences mean there will be more matches during European or US and Latin American trading hours than any previous tournament.

A study done during the last Fifa World Cup with similarly timed games, the 2010 finals in SA, showed trading volumes on share markets dropped by a third on average when matches were on and 55% when a market’s own team played.

Oil prices were down, facing pressure from evidence of rising US output and uncertainty over supply, before a meeting next week of the world’s largest exporters. US crude fell 0.3% to $66.44 a barrel and Brent was last at $75.95, down 1.03% on the day.