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Market Comment | EUR appreciated while yields declined after ECB meeting

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  • Financial markets reacted mainly to the ECB monetary policy meeting. Currencies showed significant variations, as did bonds yields. Nonetheless, stock prices were little changed during the session.
  • The ECB decided to leave its monetary policy stance unchanged (see), although it marginally changed its outlook for growth and inflation (slightly higher growth and lower inflation). In the communiqué, the ECB also left its downward bias in QE unchanged. In the press conference, Mr Draghi confirmed that decisions on the future of QE would be taken in the October meeting. He also mentioned the strong EUR as a cause of uncertainty about inflation (see), and he did not show concern over scarcity issues related to QE.
  • The EUR, which was trending higher after the upward revision of EZ GDP (see), appreciated strongly after Draghi confirmed that the stimulus reduction might be decided in October (see). Importantly, the EUR appreciation coincided with a weak USD on the back of significantly higher than expected jobless claims – partly due to Hurricane Harvey – which also moderated expectations of a US rate hike this year (see).
  • Sovereign bond yields declined sharply across the board due to a number of factors. Firstly, the fact that the ECB did not lower the downward bias in asset purchases, pushed down bond yields, especially in the European periphery. Secondly, weak employment data in the US trimmed expectations of future US rate hikes, leading to a further decline in US Treasury yields, which spread to other markets. Thirdly, Hurricane Irma created additional risk-off demand for bonds.
  • Apart from this, concerns over US debt-ceiling faded as the White House and congressional leaders agreed to package together a $7.85bn Hurricane Harvey relief bill, a debt ceiling extension and a three-month continuing resolution (CR) spending bill that provides certainty until mid-December that the government will keep operating.
  • Stock prices in Europe inched up, despite the appreciation of the EUR, led by the utilities sector. The financial sector was among the worst performers, a sector particularly sensitive to interest rate expectations. Meanwhile, in the US, share prices were almost unchanged.
  • Oil prices were little changed despite a lower USD as US crude oil inventories grew above expectations. Nonetheless, EM currencies appreciated notably on a weak USD.

 

Update 18 CET 07 September, 2017

Table 1

 

Source: Bloomberg, Datastream and Haver

* With one day delay

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