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With No Concrete Action in Europe, Stocks Slump

Thursday, 02 Aug 2012 02:36 PM

Global stocks and the euro tumbled Thursday after the European Central Bank disappointed investors who were hoping for immediate action to combat the eurozone debt crisis.

The ECB signaled plans to push down borrowing costs for eurozone countries through upcoming bond purchases, though the move is likely weeks away.

The central bank, which said it would wait to see if the euro zone economy slows further before cutting interest rates, pledged last week it would do what it takes to support the euro.

The U.S. Federal Reserve took a similar wait-and-see approach on Wednesday and did not announce any new stimulus measures to help revive a flagging U.S. recovery. Data on Friday is expected to show the U.S. economy added 100,000 jobs in July, not enough to lower an 8.2 percent jobless rate.

ECB President Mario Draghi "set us up like a poker room full of suckers," said Todd Schoenberger, managing principal at the BlackBay Group in New York. "We were all expecting a shock-and-awe moment."

The Dow Jones industrial average closed down 92.18 points, or 0.71 percent, at 12,878.88. The Standard & Poor's 500 Index fell 10.14 points, or 0.74 percent, to 1,365.00. The Nasdaq Composite Index fell 10.44 points, or 0.36 percent, to 2,909.77.

The euro, which had rallied above $1.24, beat a quick retreat to $1.2132 for its biggest one-day move in a year. It last changed hands at $1.2178, down 0.4 percent.

Safe-haven U.S. Treasuries rose, with the benchmark 10-year note up 12/32 to yield 1.48 percent, while Spanish and Italian bond yields rose and European shares fell.

The FTSEurofirst 300 index closed 1.2 percent lower and the MSCI world stock index lost 1.0 percent.

Spanish and Italian stocks were hit especially hard, with indexes falling around 5 percent each.

Reuters reported on Monday that the ECB was considering re-activating its Securities Markets Program to buy Spanish bonds in tandem with the eurozone's rescue funds, but that action could be at least five weeks away.

"Draghi put himself in such a difficult position," said Joshua Raymond, chief market strategist at City Index. "There has been a swift change in the rhetoric from 'we will' last week to 'we may' today.

Brent crude oil settled 6 cents lower at $105.90 a barrel, while U.S. crude fell in tandem with stocks and other growth-sensitive assets to settle down $1.78 at $87.13. Spot gold fell $10.25 to $1,588.30

LAYING THE GROUNDWORK

Since Draghi surprised markets last week with a promise to save the euro, European shares had rallied by as much as 5 percent, the euro has risen about a cent against the dollar and yields on Italian and Spanish debt had fallen sharply.

Some, though, said the ECB president made clear that policymakers are serious about helping indebted countries such as Spain and Italy and stopping the crisis from worsening.

"What he said was pretty significant. He seems to have laid the groundwork for substantial policy action," said Andrew Wilkinson, chief economic strategist at Miller, Tabak & Co. "It wouldn't surprise me if we get a risk rally in the days ahead.

Stephen Jen, managing partner at SLJ Macro Partners, said the market expected too much.

"The market demanded short-term fixes. I think this reflects how the markets have been conditioned by the Fed's repeated (stimulus) operations. Investors have now been reminded that there are no quick fixes for the problems in Europe."

The Fed has been much quicker than its eurozone counterpart to pump money into the financial system. It has already bought assets to the tune of $2.3 trillion and pledged to keep interest rates at zero until at least late 2014.

Though it stood pat this week, it said it was ready to act if necessary. Investors expect it could launch another round of bond purchases as soon as September.

The U.S. economy lost momentum in the second quarter as the pace of hiring slowed and consumer confidence weakened.

Data Thursday showed the number of Americans filing initial claims for unemployment benefits rose slightly in the latest week, though less than economists had expected.

© 2017 Thomson/Reuters. All rights reserved.

 
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Thursday, 02 Aug 2012 02:36 PM
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