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Euro slumps, bonds rally after ECB puts more pressure on Greece

Thursday, February 5, 2015 - 06:51
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Euro-area inflation was weaker than economists predicted in December, when the European Central Bank stepped up its stimulus program.

[NEW YORK] The euro slumped late on Wednesday and safe-haven US government bonds rallied after the European Central Bank abruptly canceled its acceptance of Greek bonds in return for funding, putting more pressure on Greece to reach new reforms.

The move, which means that the Greek central bank will have to provide its banks with tens of billions of euros of additional emergency liquidity in the coming weeks, was a response to what many in Frankfurt saw as the Greek government's abandoning of its aid-for-reform program.

The action was unexpected and fueled a drop of 1.3 per cent in the euro, while the US dollar index extended its gains and jumped 0.9 per cent, nearly erasing its biggest one-day fall since October 2013 in Tuesday's session.

In an indication of how Greek equities might trade on Thursday morning, the Global X FTSE Greece exchange-traded fund dropped 10 per cent in the last half-hour of the New York trading session. "I would imagine tomorrow Greek bonds sell off hard, and the Greek stock market gets hit hard, especially the banks," said Marc Chandler, chief currency strategist at Brown Brothers Harriman in New York.

The news contributed to a decline in US equities toward the end of the trading day, though Wall Street was also affected by losses in energy prices. US crude futures, which had risen almost 20 per cent over the previous four sessions, fell 8.4 per cent. Brent crude fell 5.9 per cent.

The benchmark 10-year US Treasury note rose 3/32 in price, putting the yield at 1.7675 per cent, but before the Greece news the yield was at 1.81 per cent. "I think this is a real act of vengeance by the ECB and the EU and I think it's a shame," said Mark Grant, managing director at Southwest Securities in Fort Lauderdale, Florida. "You saw the stock market, which had been up over 100 as soon as this hit the wires, drop down to a slight positive; Bonds go from being down a point to up a point." "It's just the reaction of the American markets, and when people begin to think about this tomorrow (in Europe), they're going to get hit as well." The Dow Jones industrial average rose 6.62 points, or 0.04 per cent, to close at 17,673.02, the S&P 500 lost 8.52 points, or 0.42 per cent, to 2,041.51, and the Nasdaq Composite dropped 11.04 points, or 0.23 per cent, to 4,716.70.

The Dow was supported by Walt Disney Co, which jumped 7.6 per cent a day after reporting results, while a decline in biotechnology shares dragged on the Nasdaq, led by Gilead Sciences, which slumped 8.2 per cent a day after the drugmaker reported steeper-than-expected discounts on its hepatitis C drugs to health insurers and other group payers.

Shares in Europe, which closed prior to the ECB's announcement, ended up 0.6 per cent. A measure of world stock markets was up 1.3 per cent.

The US Labor Department is due to release its jobs report for January on Friday.

In precious metals trading, gold rose 0.3 per cent while silver was up 0.4 per cent. Copper rose 0.3 per cent after surging 3.5 per cent on Tuesday in the biggest one-day move since May 2013.

REUTERS

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