ECB says markets over-reacted to Draghi’s stimulus signals

ECB president’s remarks seen as indicating a tapering off of economic stimulus

Senior figures at the European Central Bank indicated the market misjudged remarks by ECB president Mario Draghi that were seen as signalling a move towards withdrawal of economic stimulus.

Senior figures at the European Central Bank indicated the market misjudged remarks by ECB president Mario Draghi that were seen as signalling a move towards withdrawal of economic stimulus.

 

The euro came off a 2017 peak and euro zone sovereign bond yields cooled on Wednesday, after senior figures at the European Central Bank indicated the market misjudged remarks by Mario Draghi that were seen as signalling a move towards withdrawal of economic stimulus.

The currency fell into negative territory for the session — down 0.2 per cent at $1.1320 — after Bloomberg first carried the reports. Earlier, the euro set another high for 2017 of $1.1366. The turnaround took its gains for the calendar year to below 8 per cent.

Beforehand, investors were focused on the ECB president’s comments that “deflationary forces have been replaced by reflationary ones”. The phrase was delivered in a keynote speech at the ECB’s annual conference in Portugal, as a signal the central bank would reduce its bond buying in the coming months because an improving economy required less monetary easing.

“Yesterday’s remarks from Draghi were intended to have an effect, now the ECB seems to be managing out the effect of the effect,” said Stephen Gallo, European head of FX strategy at Bank of Montreal.

“Concerns can tend to be centred on the exchange rate, and the central bank will almost always seek to limit volatility in this area unless there is some type of extreme mispricing of risks by the market. Prior to Draghi’s remarks yesterday, we did not detect such an extreme mispricing of risks.”

The yield on 10-year German debt also turned round as the session developed, to hit the flatline at 0.35 per cent, having been up 4 basis points earlier. Yields move inversely to prices.

France’s 10-year yield fell 3 basis points over the day to 0.70 per cent as investors moved back into the debt, having been up 15 basis points earlier. Spain’s 10-year yield fell 4bp at 1.42 per cent.

The earlier rises in euro zone bond yields had rippled around the world.

The yield on the US 10-year Treasury remained higher, up 2bp at 2.22 per cent on Wednesday, up from 2.14 per cent on Monday — and around the highest level for the benchmark bond since the Federal Reserve raised interest rates this month.

“I reiterate the danger that is the European bond market,” said Peter Boockvar, chief market analyst at the Lindsey Group. “As the ECB gets deeper into its taper, it can single-handedly drag US yields higher.”

Michael Cloherty, a strategist at RBC Capital Markets, said: “Even when it is market specific news to Europe, it affects pricing in the US.”

- Copyright The Financial Times Limited 2017.