Stocks Slide After ECB Signals Rate Cut
Market Movers
- ECB gave dovish signals but Draghi's commentary fueled concern about outlook.
- Earnings results weighed on stocks today.
- Durable Goods Orders rose 2.0% vs. 0.7% expected.
- Initial Jobless Claims of 206,000 were below the 218,000 expectation, reflecting a still-strong jobs market.
Mike’s Commentary
Markets are taking their cues from The ECB today. Even though the ECB committed to looking at further interest rate cuts and more quantitative easing, ECB President Mario Draghi said in his comments that the economy is getting “worse and worse,” which ended up hurting stocks in Europe and the U.S.
Mr. Draghi actually said, “This outlook is getting worse and worse. It’s getting worse and worse in manufacturing, especially, and it’s getting worse and worse in those countries where manufacturing is very important.” That does not exactly inspire confidence.
At first, stocks moved higher pre-open on the (expected) dovish commentary, but then gave back gains on discussion that the stimulus should have been even more given the increased possibility of a recession. So, a bad economy is good if the rate cuts help stock prices but that only goes so far. If an economy is really bad, then rate cuts will not be enough to stave off the earnings decreases.
In earnings news, 3M, Ford, Tesla, Dow, and PayPal were amongst the reporters with results to digest this morning. All five were trading lower, which of course contributes to the weakness in stocks this morning. Tonight we’ll look for Amazon and , among many others.
Still, even with the ECB news and the earnings drag, stocks are down “only” about 0.5% or 125 Dow points - not too far from recent records.
Each sector is lower today, with Energy and Materials the worst performers and Staples and Healthcare among the “least worst.”
In economic news, Durable Goods Orders rose 2.0% vs the 0.7% forecast after declines in three of the past four months. It seems the factory sector in the U.S. is doing better than much of the rest of the world. Let’s hope these orders flow into actual manufacturing production in future months. The employment picture was also good, with initial jobless claims falling 10,000 to 206,000 from vs. 218,000 and 216,000 last week.
Sector Recap
Brian’s Technical Take
The ECB did not take any action today but strongly signaled it can cut rates deeper and potentially restart buying bonds if needed. Draghi specifically noted the economic outlook is “getting worse and worse” and highlighted concerns about manufacturing activity and falling inflation.
The EURUSD currency pair made a new 52-week low before rebounding towards the midpoint of this week’s range. Today marks the 4th time the 1.112 level has been tested since late April thus making it a critical support level.
The ball is now in the Fed’s court. Next week’s FOMC is widely expected to be the start of the first rate cut cycle since the early days of the housing crisis. The 25bps rate cut is all but a given. The focus will be whether the committee starts this cycle with a 50bps cut like the prior two cycles, and any clues as to the expected magnitude of cuts into year end 2020.
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