Markets Rally on Hopes That ECB Will Delay Tapering

By Jon Sindreu Features Dow Jones Newswires

Global stock markets rallied Wednesday and the euro fell on the prospect that the European Central Bank will leave monetary policy loose for longer than expected.

Continue Reading Below

The Dow Jones Industrial Average rose 20 points, or less than 0.1%, to 21155. The S&P 500 gained 0.1% and the Nasdaq Composite added 0.3%.

The Stoxx Europe 600 climbed 0.4% after media reports that the ECB will lower its inflation forecast for 2019. This was a signal for investors that officials will strike a dovish tone in their long-awaited policy decision Thursday, with anticipation of continued central bank support typically pressuring the euro while pushing investors into riskier investments like equity.

The euro fell 0.4% against the U.S. dollar. European banks, which are one of the region's riskier investments, were up 1.3%. Banco Santander shares lost 0.7% after it announced the takeover of Spanish rival Banco Popular Español, which the ECB had deemed "likely to fail" earlier Wednesday.

Meanwhile, some assets investors perceive as havens slipped. Gold was down 0.4%. Yields on the benchmark 10-year U.S. Treasury note rose to 2.160%, according to Tradeweb, from 2.147% Tuesday. Yields rise as prices fall.

Stocks had slipped in recent sessions as investors waited for a series of scheduled events that have the potential to create big moves in global markets. Beyond the ECB's announcement, former U.S. Federal Bureau of Investigation director James Comey is expected to testify in Washington. Early results for the U.K. general election will start coming in that day, with the latest polls suggesting a tighter race than originally anticipated.

Continue Reading Below

"What we have seen is some of that reflation trade and optimism come out of the market," said James Ilsley, fund manager at J.P. Morgan Asset Management. "We've seen some of those bond proxy, more defensive areas, outperform, but as the economic data improves you'd expect that to change."

Many analysts now believe recent increases in inflation are mostly the result of higher oil prices, rather than stronger consumer demand, and such effects could start to fade soon. Last week, official figures showed eurozone inflation falling to 1.4% in May, after coming close to the ECB's target of close but below 2% for several months.

Oil prices have traded in a relatively narrow range between $45 and $55 a barrel since the start of the year. On Wednesday, U.S. crude lost 1.1% to trade at $47.68.

"It's less about the rallying into safety havens and more about toning down interest rate expectations," said Zhiwei Ren, fund manager at Penn Mutual Asset Management. "I don't think inflation can surprise on the upside at this point."

Investors had long marked June's ECB meeting in their calendars as the date when officials could hint at the possibility of tighter monetary policy, so the prospect of ECB President Mario Draghi delivering a dovish speech is a boost for stocks, bonds and the single currency.

He "would have to be very outspoken, vehemently rejecting a change of the forward guidance for the market to lower the market's rate expectations and for the euro's upside momentum to be slowed," said Antje Praefcke, analyst at German lender Commerzbank.

In Asia, the Japanese Nikkei Stock Average and Australia's S&P/ASX 200 both closed flat, while Korea's Kospi lost 0.4%. The Shanghai Composite Index was up 1.2%.

Ese Erheriene contributed to this article.

Write to Jon Sindreu at jon.sindreu@wsj.com

(END) Dow Jones Newswires

June 07, 2017 10:02 ET (14:02 GMT)