The euro steadied and European shares and bonds rebounded on Friday after being savaged on Thursday when the European Central Bank unveiled a huge new stimulus plan but signalled it was unlikely to cut its negative interest rates further.
Markets were starting to focus on the positive features of the ECB policy package, with surges to 2016 highs for both US oil prices and China’s yuan also boosting confidence.
The pan-European FTSEurofirst 300 index jumped 2.3 per cent after falling 1.8 per cent in the previous session, although it and MSCI’s 46-country ‘All World’ index were on course for their first weekly falls in a month.
Euro traders were getting their breath back after a near 4 cent move for the currency following the ECB’s announcements. The euro slipped back to $1.1105, having climbed from a trough of $1.0820 to a peak of $1.1217 on Thursday, a vicious move that would have stopped-out both bulls and bears and left everyone nursing losses.
“The markets are doing alright today,” Societe Generale FX strategist Alvin Tan said. “The ECB did deliver easing for sure but it was a mixed message.
“It fits with our broader view that for the euro - and the yen, for that matter - to drop durably lower, the [US Federal Reserve] will have to raise its rates further.”
Bond markets were also stabilising, with German Bunds down 4 basis points at 0.27 per cent in early trade. At one point on Thursday, German 10-year yields doubled from a low of 16 basis points to a peak of 32 basis points, a giant move for a benchmark long-term bond.
ECB President Mario Draghi’s suggestion there would be no further interest rates cuts overshadowed the euro zone central bank’s bold easing package, prompting criticism that he had once again botched his communication.
He was quick to note that new facts could change the outlook and emphasised his willingness to adopt other radical measures, but by then the damage was done.
Against the yen, the euro hit a three-week high of 126.86 yen on Friday, before reversing back to a flat 126.40. The dollar bounced back after coming off sharply as the risk mood darkened. It was last up 0.5 per cent at 113.74 yen, though still below Thursday’s pre-ECB peak of 114.45.
Against a basket of currencies, the dollar added about 0.6 per cent to 96.654, but it was still down 0.8 per cent for the week, having shed 1 per cent on Thursday. Many analysts considered the market reaction rather perverse given the ECB’s actual steps were very aggressive.
As well as cutting all its main interest rates, the bank lifted its asset-buying programme by 20 billion euros a month, expanded the assets to include non-bank corporate debt and said it would effectively pay banks to take its cash to lend on.
In commodity markets, the rise in the dollar was starting to weigh on gold, which had earlier made a 13-month top at $1,282.51 an ounce. It was last at $1,262.98, on track to gain almost 1 per cent this week.
Oil prices also edged higher after dropping on Thursday, extending the recent run of see-saw trading. Brent added 1.7 per cent to $40.73 a barrel, while US crude gained 2.2 per cent to $38.67 to hit its highest level of the year. Both of the benchmarks are now up roughly 50 per cent since their mid-January lows.
Europe's oil and gas index rose 1.9 per cent and the STOXX Europe 600 Basic Resources index was up 2.5 per cent, the top sectoral gainer, as prices of major industrial metals also rose sharply. Glencore, Anglo American and Rio Tinto rose 3 to 4 per cent.
Overnight, Asian shares had risen as the region also secured weekly gains, contrasting with most of the rest of the world. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.1 per cent on the day and the week, while Australia ended up 0.3 per cent.
Japan’s Nikkei erased earlier sharp losses and ended up 0.5 per cent, though still fell 0.4 per cent over the week. Chinese shares lagged the region, weighed down by the banking sector, as Beijing’s plan to allow debt-to-equity swaps by commercial lenders was viewed by some investors as being largely negative.
The blue-chip CSI300 index fell 0.6 per cent, while the Shanghai Composite Index was down 0.7 per cent in afternoon trade. China’s central bank underlined its commitment to a firm yuan by fixing the currency at the high for this year.