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new York - Investors raced to press the sell button on
stocks and the euro Thursday, citing dismay at the European Central Bank’s
lukewarm support for aggressive action to ease a two-year old debt crisis.
In comments after the central bank’s move to cut interest rates to
1 percent, ECB President Mario Draghi poured cold water on market expectations
the ECB could step up bond purchases seen as key to stabilizing rising borrowing
costs of indebted members of the euro zone. “This is big - a lot of people,
stocks, bonds, currencies, had been counting on the ECB, and he’s basically
pulled the rug out from under the market,” said Brian Dolan, chief strategist at
Forex.com in Bedminster, New Jersey.
Draghi, who took over the reins from Jean-Claude Trichet last
month, also revealed that the decision to ease rates was not unanimous.
The central bank president said last week further actions could
follow if European leaders agreed on tighter budget controls, which analysts had
taken to mean the ECB would increase its bond purchases of struggling euro zone
members. But Draghi played down that view.
“There’s a sense of shock right now because he previously suggested
that if EU leaders got things together, the ECB would step up bond purchases and
provide support. Draghi is now suggesting he was surprised by that
interpretation and that he did not signal big bond purchases.”
Investors were focusing on a key EU summit beginning later in the
day. Hopes had run high that policymakers would agree to a credible solution for
stopping the debt crisis from spreading, but Draghi’s comments also appeared to
dampen hopes that this would spur additional ECB action.
Draghi also announced unprecedented action to prevent a potential
credit crunch, saying the ECB will start offering banks funding for 3 years, as
well as easier collateral rules.
But markets are less concerned with the possibility of a liquidity
crunch than the high price of debt for troubled countries, and European and US
stocks were down about 1 percent.
“One step forward, two steps back,” said Alan Clarke, UK and euro
zone economist at Scotia Capital. “The euro zone leaders might as well not
bother. Pack their bags, go home, enjoy the weekend and do their Christmas
shopping.”
The Dow Jones industrial average fell 73.26 points, or 0.60%, to 12 123.11. The Standard & Poor’s 500 Index lost 11.32 points, or
0.90%, to 1 249.69. The Nasdaq Composite Index gave up 17.05 points, or
0.64%, at 2 632.16.
The MSCI All-Country World Index was down 1.5%, while the
FTSEurofirst 300 was down 1.3%.
The leaders of France and Germany were in Marseille ahead of the
summit, lobbying for their plan to amend the EU treaty to toughen budget
discipline.
Paris and Berlin need to win backing quickly for their plan if they
are to have it ready as they hope by March.
Wrapping up his visit to Europe, US Treasury Secretary Timothy
Geithner said the world could be encouraged by the euro zone’s progress in the
last few weeks.
The euro fell across the board following Draghi’s comments. The
currency fell to session lows at $1.33120 and was last at $1.33240, down 0.7%.
Commodity prices were also hit by worries Europe was not doing
enough to contain the credit crisis. Spot gold was last bid at $1 713.80 an
ounce, down 1.6% on the day, while US crude oil futures fell $1.65 to
$98.84 a barrel.
“A final solution out of Europe is highly unlikely,” Jeremy
Friesen, Commodity Strategist at Societe Generale in Hong Kong, said, but he
added that a total breakdown was also unlikely.
“I don’t expect (German Chancellor Angela) Merkel or any hawkish
decision-makers to squander this opportunity to really make reforms, now that
they have come so far. I don’t see them capitulating at this point.”
