MarketBite

European Central Bank President - Mario Draghi

European stocks fell and the euro slipped against the dollar after comments by European Central Bank President Mario Draghi were laced with caution, tempering the positive sentiment following Wednesday’s coordinated liquidity moves by central banks.

Draghi, speaking to the European parliament on the joint measures by banks, warned that downside risks to the economic outlook have increased and he also cautioned that dysfunctional government bond markets in several euro-area countries are hampering single monetary policy. In addition, the ECB’s president said the central bank’s bond purchases can only be limited.

Newedge economist Annalisa Piazza said, “The ECB stands ready to act to face the current challenges, both with standard and non-standard measures. However, Draghi said the importance of the creation of a commonly shared fiscal consolidation. In a nutshell, we see the ECB to continue to provide support in the direction of reducing the current imbalances. However, its independence is re-affirmed.”

By 0910 GMT, the Stoxx Europe 600 index was down 0.7% at 238.40. This follows a gain of 3.6% on Wednesday, the biggest percentage gain since Aug. 12. London’s FTSE 100 fell 0.3% to 5489.11, Frankfurt’s DAX declined 0.8% to 6041.70 and Paris’s CAC-40 was 0.9% lower at 3125.85.

Cyclical stocks were leading the declines, with investors taking advantage of the strong gains in the previous session and taking profits. The Stoxx Europe 600 construction and materials sector was down 1.6%, the basic resources index was 1.4% lower and the insurance index was down 1.3%. Cyclical sectors, which are sensitive to the economy, all rose strongly on Wednesday after the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank agreed to lower the pricing on existing temporary U.S. dollar liquidity swap arrangements by 50 basis points.

However, despite the action, the underlying issues affecting the European sovereign debt crisis remain unsolved. Indeed, Goldman Sachs said in the near term, it expects European equity markets to fall further as recession is priced in and earnings downgrades accelerate. The investment bank announced a more defensive stance in its portfolio, downgrading the banking, industrial goods and services, basic resources, food and beverages, and autos sectors. It upgraded technology and health care.

Meanwhile, euro-zone purchasing managers index manufacturing data were in line with expectations, confirmed at 46.4 in November. The index is at its lowest level since June 2009 but still 13 points higher than its record low. The data had little bearing on markets.

Earlier, Asian stock markets surged Thursday following the moves by major central banks Wednesday to lower dollar funding costs for European banks and after the People’s Bank of China cut its reserve requirement ratio for the first time in over three years.

Hong Kong’s Hang Seng Index advanced 5.6%, while China’s Shanghai Composite advanced 2.3%. Japan’s Nikkei Stock Average rose 1.9%, Australia’s S&P/ASX 200 climbed 1.9%, and South Korea’s Kospi Composite jumped 2.3%.