Stocks Flat Despite European Stimulus
By Laif Meidell, CMT, President of American Wealth Management, and Portfolio Manager of the AdvisorShares Meidell Tactical Advantage ETF (NYSE Arca: MATH) and the AdvisorShares Market Adaptive Unconstrained Income ETF (NASDAQ: MAUI)
Stock index futures rallied prior to the opening bell on Thursday following the news that the European Central Bank delivered on its promise to step up its current stimulus plan with additional measures.
In the announcement, the ECB outlined a 10 basis point cut to its deposit rate, taking it down to minus 0.4 percent, a 5 basis point decrease in its benchmark refinancing rate, down to zero, and dropping the rate on its marginal lending facility from 0.3 percent to 0.25 percent.
Additionally, the ECB said it would increase its monthly asset purchase program to €80 billion per month, a €20 billion increase, and would add investment grade corporate bonds to the assets that it will buy.
The ECB’s stimulus news was above most analysts’ expectations and initially greeted favorably by global markets. Some headlines read “The ECB Bazooka is Back” and “The ECB Doesn’t Disappoint.” However, 30 minutes into the trading day stocks’ gains began to unravel following comments from ECB President Mario Draghi, who said he didn’t see the ECB lowering interest rates in the future, but would focus on other measures if necessary.
Intraday, the major market averages traded below Wednesday’s low. However, with two hours remaining in the day, calmer heads prevailed as stocks erased their losses to finish close to flat on the day. The Dow Jones Industrial Average slipped 0.03 percent and the Standard and Poor’s 500 eked out a 0.02 percent gain.
Some of the real excitement Thursday was in the bond market as investors snatched up lower quality bonds, in addition to international investment grade corporate bonds. The idea that the ECB is stepping up its stimulus plan means that financially struggling companies will now have a bigger lifeline to keep them going, reducing the likelihood they will default on their bonds.
The S&P International Corporate Bond index rose 0.99 percent on Thursday, making it the top performing bond index for the week, up 1.83 percent over the past five trading days. Also at the top of this week’s list was U.S. investment grade bonds and junk bonds with the Markit iBoxx U.S. Liquid Investment Grade index up 0.93 percent and the Barclays High Yield Very Liquid index up 0.68 percent.