ECB Bond Buying Program: Market Reaction and U.S. Stock Performance

It was a somewhat bumpy week for U.S. stocks with corporate earnings driving most of the swings. Tuesday’s positive results from Caterpillar and 3M led equities higher, but a string of negative surprises on Wednesday wiped out gains. Markets then sharply rebounded Friday on the back of strong results from industry giants Google, Amazon, Microsoft and Intel. Foreign stocks mostly followed suit, but were unable to end the week in positive territory. U.S. bond yields moved higher while the dollar strengthened against the euro.

Weekly Returns:
S&P 500: 2,581 (+0.2)
FTSE All-World ex-US: (-0.2%)
US 10 Year Treasury Yield: 2.42% (+0.03%)
Gold: $1,273 (-0.5%)
EUR/USD: $1.161 (-1.5%)

Major Events:

• Monday – Tesla struck a deal with China to build a new manufacturing facility in Shanghai, a move intended to capitalize on China’s fast-growing EV market.
• Tuesday – Bellwethers Caterpillar and 3M both reported stronger than expected quarterly results.
• Wednesday – A string of disappointing earnings from the likes of Chipotle, Boeing and AT&T sent U.S. equities lower.
• Thursday – The ECB announced its plan to extend, yet reduce bond purchases over the coming year.
• Friday – U.S. GDP grew at a 3% annual rate in the third quarter, ahead of most estimates.
• Friday – The technology sector notched additional gains following upbeat results from Google, Microsoft and Intel. While not officially considered part of the tech sector, Amazon also posted strong quarterly growth.

Our take:
Slow as we go…

On Thursday, the European Central Bank (ECB) revealed plans regarding the future of its bond buying program. It was a highly anticipated announcement as many around the world look for clues as to when quantitative easing will finally come to an end in Europe.

As it turns out, the party will continue for a while longer—the music will just be turned down a tad. The ECB plans to keep buying bonds until at least September of 2018, but will cut its monthly purchases in half starting in January. The central bank also left open the possibility of continuing past September should the situation call for it.

So at the end of the day there appears to be no imminent risk of the ECB raising rates, at least in the near-term. Instead, it will be a slow and measured process. This was more or less in line with expectations with perhaps a slightly more dovish tone, and it was enough to placate markets. Only time will tell whether this extended period of stimulus will be a good thing, but at least they planted the seed for future tightening without sparking another taper tantrum.