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Thursday, September 4, 2014

STOCKS RISE THEN FALL AFTER ECB SHOCKER: Here's What You Need To Know

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September 04, 2014

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Stocks finished Thursday lower after an eventful morning that saw the European Central Bank unexpected cut interest rates and signal that it would begin an asset purchase program in October. Markets in Europe rallied after the ECB's announcement, and stocks in the U.S. opened higher, but lost altitude steadily during the day and closed with small losses. 

First, the scoreboard:

  • Dow: 17,069.58, -8.7, (-0.05%)
  • S&P 500: 1,997.65, -3.1, (-0.15%)
  • Nasdaq: 4,562.29, -10.3, (-0.2%)

And now, the top stories on Thursday:

1. The biggest story on Thursday was the ECB's decision to cut interest rates. Market expectations were for the ECB to keep rates unchanged, but the central bank decided to take its main overnight rate down to 0.05%, its marginal lending facility to 0.3%, and its deposit facility to -0.2%. These rates are down from 0.15%, 0.4%, and -0.1%, respectively. Following this announcement, the Euro plunged against the dollar, trading below $1.30, its lowest level since last summer. 

2. At his press conference accompanying the rate decision, ECB president Mario Draghi said the ECB would begin the purchase of asset-backed securities and Euro-denominated covered bonds in October. Draghi said the scale of these purposes was not known, but Draghi did say the ECB would be willing to expand the size of its balance sheet as part of these operations. The ECB staff also gave its updated inflation and GDP expectations, cutting its GDP outlooks for 2014 and 2015 to 0.9% and 1.6%, respectively, while projecting that inflation will come in at 0.6% and 1.1% in 2014 and 2015, respectively. 

3. In Draghi's press conference, he reiterated many of the comments made at Jackson Hole in late August, when Draghi said that fiscal and structural reforms are also needed in addition to the ECB's monetary actions, to spur growth in the Eurozone. BI's Tomas Hirst noted that Draghi's comments Thursday can be read as a challenge to politicians around the Eurozone, namely German chancellor Angela Merkel, to pare their austerity programs with Draghi argues has impaired the Eurozone's economic recovery. 

4. In the U.S., we got two pieces of employment data ahead of the U.S. monthly jobs report which is expected to be released Friday morning. Weekly initial jobless claims rose slightly, to 302,000 from 298,00 a week ago. ADP's monthly report on private payrolls showed that private employers added fewer workers than expected, with payrolls climbing by 204,000, down from July's 212,000 gain and lower than the 220,000 increase expected by economists. 

5. Also on the U.S. data front, ISM's non-manufacturing PMI report for August came in at 59.6, up from 58.7 in July to mark the highest reading since August 2005. 

6. Shares of oil giant BP fell nearly 6% after a court found that the company was grossly negligent in its 2010 Deepwater Horizon Gulf of Mexico oil spill. The company has already agreed to pay out $13.7 billion in damages, and the ruling on Thursday allows the U.S. to seek a maximum fine of $18 billion. 

7. David Tepper, founder of $20 billion hedge fund Appaloosa Management, said that the bond rally is over, "It's the beginning of the end of the bond market rally," Tepper told Bloomberg's Stephanie Ruhle. "We are done." Tepper's comments come after Jeff Gundlach of DoubleLine Funds, one of the few people on Wall Street to predict this year's rally in bonds, told BI in early August that he expects the 10-year yield to remain between 2.2%-2.8% this year. 

8. On Friday morning, we get the August jobs report from the Bureau of Labor Statistics. Expectations are for nonfarm payrolls to grow by 230,000 in August and the unemployment rate is expected to fall to 6.1%. Here's BI's preview to get you ready for the report, which we'll be covering live. 

Don't Miss: Investors Better Be Comfortable With This Weird-Looking Risk-Reward Chart »

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