Euro extends gains as ECB fuels ‘taper’ talk but equities soften

AFP: The euro extended its gains yesterday after the European Central Bank said it would begin re-evaluating its easy-money policies in the autumn, fuelling talk that the age of cheap money was coming to an end.

However, stock markets were flat to softer as profit-takers moved in after a healthy week and traders were spooked by reports the man probing US President Donald Trump’s links to Russia will also investigate his business dealings.

“European stocks markets haven’t moved much from yesterday’s close. Volatility is low as Europe followed on from Asia’s relatively quiet session,” said CMC Markets analyst David Madden. 

“The strength of the single currency has prevented traders from swooping in and picking up bargains. The eurozone equity markets will find it difficult to attract new buyers as traders feel the ECB is going to rein in its loose monetary policy as we approach the back end of the year.”

ECB chief Mario Draghi on Thursday tried to play down talk the bank is preparing to wind down its 60 billion euros (US$69 billion) a month asset-buying scheme saying inflation remained tepid.

However, he added: “We simply said that our discussions should take place in the fall, or in autumn, since we are in Europe.”

While Draghi tried to remain guarded, traders took that to mean the bank would soon announce a “tapering”.

“The euro resumed its rally even though... Draghi said that discussions on tapering were pushed back to after summer,” said LCG analyst Ipek Ozakardeskaya.

“The ECB is certainly preparing to unwind its asset purchases programme starting from September, yet has no incitement to announce it before the decision date, given that the pricing happens almost instantaneously and a premature announcement would jeopardize the performance of the QE programme,” the expert said. 

The euro -- already on the march against the dollar as the eurozone economy picks up -- ploughed one percent higher Thursday to near two-year highs and in Asia pushed on to US$1.1642. It is also sitting at highs above 130 yen for the first time since February 2016.

Analysts said the single currency had also been given support by Trump’s ongoing travails.

Bloomberg News said Robert Mueller, the special prosecutor looking into claims Trump’s campaign worked with Moscow to sway the presidential election, would look into past transactions involving the tycoon’s firms and Russians in the past.

“Just last week President Trump said expanding the investigation beyond Russia would be out of bounds so with Mueller broadening the inquisition into Trump’s business dealings, US political risk could move to a whole new level as this foxtrot plays out,” said Stephen Innes, senior trader at OANDA.

Most Asian equity markets slipped into the red yesterday, with profit-taking also acting as a drag after a healthy July so far.

Tokyo ended down 0.2 percent, Hong Kong slipped 0.1 percent following a nine-day rally while Shanghai also closed 0.2 percent off.

Sydney eased 0.7 percent and Taipei shed 0.6 percent, while Manila and Jakarta also retreated. Seoul and Singapore rose, however.

But while the investigation continues to drag on market sentiment, good earnings and a positive global economic outlook have kept investors broadly upbeat, with all three main New York indexes sitting around record highs.