Stocks, euro fall as ECB disappoints markets

By Steven C Johnson and Richard Hubbard

NEW YORK - US stocks tumbled and the euro erased gains on Thursday after the European Central Bank, rather than take immediate action, signalled it would push down borrowing costs for euro zone countries through upcoming bond purchases.

The ECB, which also said it would wait to see if the economy slows further before cutting short-term interest rates, has pledged to do whatever it takes to ease an ongoing debt crisis and support the euro.

That disappointed investors expecting more immediate action, particularly after the Federal Reserve on Wednesday, embracing a similar wait-and-see approach, did not announce any new stimulus measures to boost US growth.

ECB President Mario Draghi “set us up like a poker room full of suckers,” said Todd Schoenberger, managing principal at the BlackBay Group in New York. “We were all expecting a shock-and-awe moment. ... It's going to be a rough day on Wall Street.”

US stocks started the day on the defensive. The Dow Jones industrial average was down 86.65 points, or 0.67 percent, at 12,884.41. The Standard & Poor's 500 Index was down 9.51 points, or 0.69 percent, at 1,365.63. The Nasdaq Composite Index was down 11.41 points, or 0.39 percent, at 2,908.80.

Currency traders were similarly disappointed. The euro, which had rallied above $1.24, retreated sharply to a one-week low beneath of $1.2182 during Draghi's news conference.

US Treasuries rose after the ECB announcement, with the benchmark 10-year note up 13/32 to yield at 1.48 percent.

Spanish and Italian government bond yields rose while European shares extended losses, with the FTSEurofirst 300 index fell 1 percent

The MSCI world equity index fell 1 percent.

Reuters reported on Monday that the ECB was considering re-activating its Securities Markets Programme (SMP) to buy Spanish bonds in tandem with the euro zone's rescue funds, but that action could be at least five weeks away.

Since Draghi surprised markets last week with a promise to save the euro, European shares have rallied by up to 5 percent, the euro has risen about a cent against the dollar, and yields on Italian and Spanish debt had fallen sharply.

Some said Draghi's comments, while disappointing to some, suggest the ECB is serious about helping indebted countries such as Spain and Italy and stopping the crisis from worsening.

“I think what he said was pretty significant. He seems to have laid the groundwork for substantial policy action,” said Andrew Wilkinson, chief economic strategist at Miller, Tabak & Co. “It wouldn't surprise me if we get a risk rally in the days ahead.”

Spain had to pay higher yields than a month ago on its 10-year bonds at an auction on Thursday, but it easily sold 3.1 billion euros of debt with yields far lower than indicated last week before Draghi's announcement that he would do whatever it takes to save the euro.

In the United States, investors are still expecting the Fed to announce another round of asset purchases to help inject life into a flagging recovery, though that likely won't happen until September.

Data on Thursday showed the number of Americans filing initial claims for unemployment benefits rose slightly in the latest week, though not as much as economists had expected.

A government employment report on Friday is expected to show the economy added 100,000 jobs in July, not enough to lower the 8.2 percent US jobless rate.

Brent crude oil fell 45 cents to $105.52 a barrel, while US crude fell $1.41 to $87.50. ($1 = 0.8132 euros) - Reuters