Lack of Stimulus sparks Euro & Turkish Lira

Draghi sparks sell-off with hawkish comments, what will it mean for the forex markets?

The ECB chief Draghi’s inspired selloff is doing some notable damage to European financial markets as we head to the market close, although cutting positions before what is likely to be an “unpredictable” nonfarm payrolls report tomorrow is also adding pressure to price-action. Wednesday’s ADP jobs report fell short of expectations but today’s weekly US jobless claims were in line with estimates, leaving investors with few clues to adjust forecasts for tomorrow’s monthly jobs report.

On Draghi, market participants are expressing their disappointment over Draghi’s tone at the press conference which sounds like he is not ready to dig deeper into the ECB’s tool box to stimulate the economy. Sure, he said negative deposit rates were discussed and the central bank is technically ready for them, that option is on the shelf, won’t be used anytime soon and other kept hush on other measures like ABS/SME lending schemes.

To markets who were expecting a dovish Draghi, this unwillingness to respond with policies is certainly not welcome news, especially as the euro zone remains stuck in a recession with little signs of coming out any time soon, at least without the use of monetary easing tools. The ECB cut growth forecasts for 2013 but were more optimistic for 2014 but that has not helped enthuse markets who are tired of hearing the same rhetoric that the ECB is ready to act but since the OMT back in September 2012, has failed to do so and let the euro zone slide deeper into a recession.

Draghi talked up the dormant OMT programme which was somewhat questionable given the state of the economy and the fact that Spanish and Italian bond yields are no longer ringing alarm bells. So overall, disappointing the ECB is unwilling to respond with easing measures, particularly as the Federal Reserve has made its intention clear that it’s looking to bow-out of the liquidity pumping game.

The reaction across equities: The DAX is off 77 points and the EUROSTOXX 50 down by 27 points in recent spread betting trade, while the Italian and Spanish 10-year government bond yields are both up 23 basis points to 4.36% and 4.65% respectively. Portuguese bond yields are up 24 bps to 5.95%, and Greek bond yields are 10 bps higher to 9.17%. The euro reaches its strongest level in nearly a month, up around $1.3189 against the dollar and German government bund yields advance by 5 bps to around 1.56%.

It must also be noted that the escalation of tensions in Turkey is certainly not helping the markets’ mood with the country’s PM defiant against protests. This has pushed the Turkish national index to extended losses to 7% from 1.3%, entering bear-market territory after a 22% drop since May 22. The Turkish lira meanwhile fell around 1% against the US dollar and the benchmark two-year government bond yields rose 0.59 percentage point to 6.91%.

Source: ETX Capital