- Stocks Drop, Euro Wobbles on Central Bank Outlooks
Central banks were the dominant theme for markets on Thursday, with European stocks tracking declines in Asia and the U.S. on the prospect of a shrinking Fed balance sheet and the euro briefly reversing after Mario Draghi reaffirmed ECB monetary policy.
The Stoxx Europe 600 Index headed for its first retreat in three days as S&P 500 futures steadied. Treasury yields pared some of Wednesday’s drop, which was triggered by speculation the Fed balance-sheet reduction could damp the need for interest-rate hikes. The Bloomberg Dollar Index returned to gains as gold and oil pared declines and the euro was little changed.
The Fed minutes did little to alter market views on the bank’s assessment of the economy, but the discussion on shrinking the $4.5 trillion balance sheet later this year underscored prospects for a drop in global liquidity. The message once again contrasted with that of the central bank in Europe, where Draghi said on Thursday “continued support for demand remains key.”
“If near-zero rates and central bank buying of bonds have been the fundamental driver of global capital towards higher-yielding assets, then reversing both parts of this can’t be helpful,” Kit Juckes, a global strategist at Societie Generale, wrote in a note. “Which is how markets have reacted overnight.”
Investors also remain focused on health care and tax policy in Washington, with House Speaker Paul Ryan saying the chances for a vote on a revised repeal of Obamacare this week were dwindling. Ryan also said tax reform could take longer, Reuters reported.