Global markets sank Thursday after the European Central Bank announced stimulus plans that came up short of what investors had forecast. The bond market was especially roiled by the ECB’s move. Bond prices in the U.S. and Europe fell sharply, and yields jumped.
The Dow Jones industrial average lost 252.01 points, or 1.4 percent, to 17,477.67. The Standard & Poor’s 500 index fell 29.89 points, or 1.4 percent, to 2,049.62 and the Nasdaq composite fell 85.70 points, or 1.7 percent, to 5,037.53. The selling pushed the S&P 500 back into the red for 2015.
The ECB’s stimulus plans, long awaited, came in with a thud on Thursday. The ECB announced a slight cut in one of its key interest rates in an attempt to stimulate lending and help a modest economic recovery. Investors had expected to see the ECB step up its monthly purchases of bonds as well.
“Financial markets were expecting the ECB to do `whatever it takes’ to stimulate inflation, and instead the ECB did `maybe what it’ll take’ to stimulate inflation,” said Guy LeBas, head of fixed income at Janney Montgomery Scott.
Europe’s economy has lagged behind the U.S. since the financial crisis, and policymakers have struggled to keep the 19 countries that use the euro from falling into deflation or an economic contraction. But the President of the ECB, Mario Draghi, has been far more aggressive than his predecessors in trying new ways to boost the economy, including its current program of negative interest rates and bond buying. Expectations were high for this week’s meeting.
“In the last couple of years, Mario Draghi and the ECB would typically over-deliver on what they indicated they would do to help stimulate the economy. So a lot of investors overbought bonds on expectations that Draghi would over-deliver. This time, he didn’t, and he disappointed the market quite a bit,” said Bob Michele, head of global fixed income at JPMorgan Asset Management.
The ECB’s announcement caused the euro to jump 3 percent against the dollar, a large move for currencies, to $1.0975. Investors had been betting against the euro ahead of the announcement, expecting that more central bank stimulus would put pressure on the currency. Investors had to unwind those positions, causing Thursday’s oversized moved in the currency market.
“People aren’t sure where to put their money so everyone just went to cash,” said J.J. Kinahan, chief strategist at TD Ameritrade.
European stocks also had one of their worst days in months. Germany’s DAX plunged 3.6 percent, its biggest drop since September. France’s CAC-40 index lost 3.6 percent and the U.K.’s FTSE lost 2.3 percent.
With the ECB not expanding stimulus as much as expected, European bond prices fell sharply, sending yields higher. If the ECB had announced more stimulus, it would have had the effect of putting downward pressure on interest rates. The yield on the 10-year German government bond soared 0.20 percentage points to 0.67 percent, a massive move in the bond market. The yield on the 10-year French government bond rose 0.20 percentage points to 0.99 percent, also a substantial move.
The sell-off in the dollar also impacted U.S. Treasuries. The yield on the 10-year Treasury note jumped to 2.32 percent, up sharply from 2.18 percent the day before.
Investors now turn to back to the U.S. While the ECB is easing policy, the Federal Reserve looks set to raise interest rates later this month for the first time in nine years. In comments Wednesday, Fed Chair Janet Yellen gave an upbeat assessment of the economy’s progress since the Fed’s last meeting in October, describing it as in line with its expectations for the labor market and inflation. She also was careful to point out the need to review upcoming data, including the U.S. jobs report Friday.
Economists forecast that U.S. employers created 200,000 jobs in November, and the unemployment rate remained steady at 5 percent.
In other markets, benchmark U.S. crude jumped $1.14, or 2.9 percent, to close at $41.08 a barrel on the New York Mercantile Exchange. Brent crude, which is used to set prices for international oils, climbed $1.35, or 3.2 percent, to $43.84 a barrel in London.
Heating oil rose 5.4 cents to $1.359 a gallon, wholesale gasoline rose 0.3 cent to $1.296 a gallon and natural gas rose 1.6 cents to $2.181 per thousand cubic feet.
In metals, gold rose $7.40, or 0.7 percent, to $1,061.20 an ounce, silver rose seven cents to $14.08 an ounce and copper rose three cents to $2.06 a pound.