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Markets See Global Risk Rally on Negative ECB Rates


Today's financial recap and tomorrow's financial outlook.

The event the market had been waiting for finally arrived: the ECB's rate decision, and it was one for the history books. The central bank lowered its deposit rate by 10bps to -0.1%, main refinancing rate to 0.15%, and marginal lending rate by 30bps to 0.4%. In addition, the ECB announced that it would cease sterilizing its existing Securities Market Programme (SMP) bond holdings, make targeted very long-term loans to banks, and lay the groundwork for future purchases of asset-backed securities. The last point was viewed by market participants as the preliminary step before the central bank would begin broader asset purchases. The move by the ECB to negative deposit rates is unprecedented for a developed market central bank.

Effectively, Mario Draghi pushed a big portion of his chips into the middle of the table to combat deflationary forces in the eurozone by increasing the supply of available credit.

Risk assets responded accordingly, although the euro / US dollar cross recovered all of its losses and finished positive by the time US equity markets closed. Italian equities, as represented by the FTSEMIB (INDEXBIT:FTSEMIB), was the best performing group in Europe today, followed by France and Spain. European sovereign bonds also performed very strongly. The Italian 5-year bond yield fell by 12.4 basis points to 1.59%, below similar maturity US Treasuries.

US equities weren't left out from the global risk rally. The S&P 500 (INDEXSP:.INX) got off to a slow start, but ended up higher by 0.65%.  All 10 basic sectors of the S&P 500 gained on the day, led by industrials and financials. In the KBW Bank Index (INDEXSP:BKX), all 24 of its components increased. On a beta-adjusted basis, the small-cap Russell 2000 (INDEXRUSSELL:RUT) outperformed by 0.8%, and tech stocks saw similar gains.

Tomorrow's Financial Outlook

There is another significant event for global markets this week: the US May nonfarm payrolls, which will be reported tomorrow morning at 8:30 a.m. EDT. Economists expect a net increase of 215,000 payrolls after an increase of 288,000 last month. Due to the severe drop in the participation rate, they expect unemployment to increase to 6.4% from 6.3% in April. Although this past Wednesday's private payrolls report showed disappointing labor activity in May, market participants expect the government figure tomorrow to exceed expectations.

Outside of the US, Germany will report its April trade balance and industrial production. Also, Canada will report its May employment report at the same time as the US.

There are no major earnings reports scheduled.

Twitter: @Minyanville

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