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Stocks on Wall Street slipped and government bond prices rallied as investors assessed the tapering of pandemic-era bond purchases, while the head of the European Central Bank reassured investors that it would only slowly withdraw its crisis-era monetary stimulus.
Wall Street’s blue-chip S&P 500 share index closed 0.5 per cent lower in New York, while the technology-focused Nasdaq Composite ended down 0.3 per cent. The yield on the 10-year US Treasury note, which moves inversely to price, slipped 0.04 percentage points to 1.30 per cent.
Markets have been focused for months on when the US Federal Reserve, the world’s most influential central bank, will announce a reduction of its pandemic-era bond-buying scheme, which has helped lower borrowing costs and boosted stocks since March 2020.
St Louis Fed president James Bullard told the Financial Times that tapering monetary stimulus “will get going this year”. On Wednesday, Dallas Fed president Robert Kaplan said the $120bn of monthly bond purchases should be reduced gradually from October.
The central bank’s main challenge, said Trevor Greetham, investment strategist at Royal London, was to avoid disruptions in financial markets by convincing investors that reducing financial support measures did not mean interest rate hikes were around the corner.
“In theory they are still going to be printing money, just a bit less,” he added. “But it could be seen as a precursor to rate hikes.”
The moves came after the ECB earlier announced that it would be slowing its bond purchases. The ECB said in a statement following its latest meeting on Thursday that it would reduce the pace of its monthly government and corporate debt purchases under its €1.85tn pandemic emergency purchase programme, its main tool for keeping economies running smoothly through the coronavirus crisis.
Having recently used the PEPP to buy about €80bn of bonds a month, the central bank on Thursday said “favourable financing conditions can be maintained with a moderately lower pace of net asset purchases”.
The Stoxx Europe 600 closed 0.1 per cent lower, paring late gains, having fallen by its most in three weeks on Wednesday. The euro inched up against the dollar to $1.1826.
The yield on Germany’s 10-year bond, which moves inversely to its price and acts as a benchmark for eurozone borrowing costs, dropped 0.04 percentage points to minus 0.36 per cent.
Italy’s 10-year bond yield dropped almost 0.1 percentage points to 0.67 per cent, as the debt rose in price following comments from ECB president Christine Lagarde that signalled continued financial support for the eurozone’s weaker nations.
In a press conference after the ECB statement was released, Lagarde quipped that “the lady isn’t tapering”, a phrase reminiscent of former British prime minister Margaret Thatcher’s “the lady’s not for turning” speech delivered at a 1980 Conservative party conference.
Lagarde added that while the ECB would “calibrate the pace of our purchases”, it had not “discussed what comes next”.
Analysts had widely expected the ECB to state a new, lower monthly purchase figure. “So the decision was a bit on the dovish side,” said Guillaume Menuet, European economist at Citi.
The European debt rally could prove short lived, analysts at TD Securites said, ascribing it to “profit-taking on a bearish bias ahead of the meeting”, while markets still need to assess what the ECB meant by a “moderate” cut in stimulus.
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