Friday, 9 September 2016

Markets fall as ECB leaves rates unchanged

Markets were mostly lower on Thursday.

The S&P 500 fell 0.2 percent and the STOXX Europe 600 fell 0.3 percent after the European Central Bank left interest rates unchanged at its monetary policy meeting on Thursday.

Earlier, Asian markets were mixed. The Nikkei 225 fell 0.3 percent but the Shanghai Composite rose 0.1 percent after a report showed that Chinese imports rose in August for the first time in almost two years.

German bund yields and the euro rose on Thursday after the ECB announced its decision but economists Simon MacAdam and John Higgins at Capital Economics think the euro will weaken in due course.

“First, we don’t think it will be long before the ECB extends its asset purchase program, which is on track to expire in March 2017. Second, we expect the Fed to hike U.S. rates significantly,” they wrote in a note.

However, ECB President Mario Draghi himself did not hint at an extension of its asset purchases at the news conference following the monetary policy meeting.

Indeed, some analysts worry that extending asset purchases risks distorting market prices. Bloomberg cites analysts at Bank of America “who argue that the ECB's Corporate Sector Purchase Programme (CSPP) could lower company borrowing costs to levels that would spark a wave of leveraged buyouts (LBOs), creating volatility in credit spreads that could shake investors' faith in the central bank and confidence in the market”.

The BofA analysts wrote that that “would be a very challenging type of event risk for the ECB to manage and could sap their enthusiasm for continuing with CSPP”.

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