Euro tumbles amid talk of Quantitative Easing acceleration

Equities around the world jumped yesterday and the euro tumbled on signals the European Central Bank may accelerate its €1tn bond-buying programme over the next two months.

The dollar gained 1.6% against the euro and was broadly ahead for a second day, while US Treasuries fell on government data showing that US housing starts in April rose to a nearly seven-and-a-half-year peak.

Wall Street, which closed at record highs on Monday, reacted little to the upbeat housing data and was last down on weak results from retailer Wal-Mart. Some traders said the stronger-than-expected housing report could encourage Federal Reserve policymakers to raise interest rates sooner than later.

The Dow Jones industrial average fell 12.61 points, or 0.07%, to 18,286.27, the S&P 500 was down 1.7 points, or 0.08%, to 2,127.5 and the Nasdaq Composite declined 5.70 points, or 0.11%, to 5,072.74.

European markets shot up after senior ECB policymaker Benoit Coeure talked of adjusting the bank’s buying programme.

He said the speed of the recent spike in bond yields, which has effectively wiped out the benefits of quantitative easing, was worrisome and that the ECB could “moderately” increase its buying in May and June, and possibly in September, to ensure it doesn’t fall behind on its target over summer.

That pushed the euro back below $1.12 for the first time in a week, and the FTSEurofirst 300 jumped 1.4% as gains of 1.8% on Germany’s DAX and in Paris outpaced a 0.4% rise on London’s FTSE. Bond yields, which move inversely to prices, also tumbled, with those on 10-year German Bunds down seven basis points.

“There is a sense the comments from the ECB indicate a growing push back against the sell-off in bond markets that’s been in place for the past month or so, and a push back against both euro strength and market volatility,” said Manik Narain, a UBS strategist.

A small rise in core eurozone inflation, meanwhile, was offset by the UK where it turned negative for the first time since the 1960’s. That knocked sterling as it fell for a third straight day against the broadly stronger dollar.

The dollar index was last up 1.20%, reflecting strong gains by the US currency against the yen and Swiss franc. The euro last traded off 1.65% at $1.1127. Treasuries were also hurt by large offerings of corporate bonds, with yields on the 10-year note last at 2.2673, a price decline of 11/32. China’s surging stocks and a jump in the New Zealand dollar, after a rise in inflation, dominated Asian trading. The CSI300 index, already up 30% this year, surged 3.4% and the Shanghai Composite Index rose 3%, as investors welcomed Beijing’s 2015 guidelines for economic reform.

Oil prices sagged for a second day as the stronger dollar took its toll alongside oversupply concerns triggered by a jump in Saudi Arabian exports. US crude dropped $1.55 to $57.88 a barrel, while Brent fell 2.3% to $64.76. Meanwhile, Greece’s European lenders played down Athens’s hopes of a swift end to negotiations on an aid agreement and said talks must speed up before the country runs out of cash. The sober outlook from Brussels and Berlin contrasted sharply with vigorous optimism displayed in Athens, where top officials from the new leftist government made a series of public appearances to promise that a deal was just days away.

Reuters


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