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Stocks, Bonds Slide on Draghi's Comments

DOW JONES & COMPANY, INC. 9:51 AM ET 10/20/2016

Stocks and bonds edged lower Thursday as investors digested comments from European Central Bank President Mario Draghi.

The Dow Jones Industrial Average declined 46 points, or 0.3%, to 18157, also hit by a decline in oil prices. The S&P 500 dropped 0.2%, and the Nasdaq Composite fell 0.2%.

The Stoxx Europe 600 inched down 0.3%.

The yield on the 10-year German government bond climbed to 0.069%, near its highest since June, after Mr. Draghi said an extension of the bank's bond purchase program hadn't been discussed. The yield on the 10-year U.S. Treasury note reversed earlier losses to touch 1.766%.

"The tone does suggest that the ECB wants to start weaning the market off sovereign QE," said Stephen Gallo, European head of currency strategy at BMO Capital Markets. "We will have to see what happens in December," he said.

On the one hand, credit growth and domestic demands are arguing for continued stimulus, but it is starting to become apparent that there are limits to the effectiveness of the bank's policies and there are many costs that go with it, he added.

Financial markets were shaken early this month by a report that the ECB could start to wind down, or taper, the program, which was subsequently denied.

The euro swung between small gains and losses and last traded down 0.3% against the dollar at $1.0936.

The bank's decision earlier Thursday to leave its main interest rates unchanged had triggered a muted market reaction, as policy makers were widely expected to postpone major policy decisions until early December, when they will have fresh economic forecasts.

"We will continue to act, if warranted, by using all the instruments available within our mandate," Mr. Draghi said.

The two big questions on investors' minds are what the bank plans to do after March, when its bond-purchase program is set to expire, and how it might tweak the program's parameters to ensure it can continue, said Isabelle Mateos y Lago, chief multiasset strategist at BlackRock.

Meanwhile, investors continued to watch corporate earnings reports in the U.S. and Europe.

Shares of American Express added 6.1% after the company beat forecasts for earnings and revenue, while eBay declined 9.8%, with investors disappointed with the company's third-quarter earnings report and guidance for the coming quarter.

"All in all earnings are coming in about as we expected, a little above consensus expectations," said David Donabedian, chief investment officer at Atlantic Trust Private Wealth Management.

"What keeps me up at night is central bank policy. Central banks are unwinding unprecedented policies without a road map," he said.

The final presidential debate Wednesday night appeared to carry little weight for markets, as investors said there was little that was likely to swing the polls.

In Europe, the media sector was the worst performer, down 1.8%, with shares of Publicis Groupe off 5% after the French company missed forecasts for third-quarter sales. Shares of Mediaset SpA also fell over 4%.

Shares of Nestlé SA fell 0.9% after the company signaled it would miss its long-term sales target, while shares of Deutsche Lufthansa rose 6.4% after the German airline lifted its earnings forecast for the year despite issuing a profit warning three months ago.

Earlier, stocks in Asia advanced after higher oil prices and better-than-expected earnings sent the S&P 500 to a higher close for a second consecutive session.

Oil prices cooled Thursday, with U.S. crude down 2% at $50.77 a barrel after touching a one-year high on Wednesday following a larger-than-expected decline in U.S. crude inventories.

Japan's Nikkei Stock Average rose 1.4%, closing at its highest level in six months, as the dollar advanced against the yen.

The WSJ Dollar Index was up 0.3% after Federal Reserve Bank of New York President William Dudley said late Wednesday that he expected the bank would be able to raise rates by the end of the year.

"The comments reinforced the fact we are in a pretty supportive environment for the dollar," BMO's Mr. Gallo said. "Barring any major disasters, the Fed is likely to move rates higher in December."

Data Thursday showed the number of Americans seeking first-time jobless benefits rose last week, but a hurricane and the Columbus Day holiday affected the reading.

Write to Riva Gold at [e-mail]


(END) Dow Jones Newswires
10-20-160951ET
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