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Draghi’s Dovish Move Was Less than Expected, Affecting US Stocks

Renee Blakely

Draghi’s Dovish Move Baffled Investors and Took SPY Down

SPY down by 1.4%

The SPDR S&P 500 ETF (SPY) and the Direxion Daily S&P500 Bull 3X ETF (SPXL) fell 1.4% and 4.2%, respectively, on Thursday, December 3, 2015. The much-awaited action from the European Central Bank’s (or ECB) head, Mario Draghi, contributed to the downtrend in US and European equities on the day. The dovish monetary policy revealed by the ECB for the Eurozone missed investors’ expectations. Here, we’ll discuss the market situation after the ECB’s monetary policy announcement as depicted in the graph below.

The US dollar is represented by the PowerShares DB US Dollar Bullish ETF (UUP), oil is represented by the United States Oil Fund (USO), and gold is represented by the SPDR Gold Trust (GLD). The treasury bond market is represented by the iShares 20+ Year Treasury Bond (TLT), while volatility is represented by the Volatility S&P 500 Index.

ECB’s monetary policy in brief

The ECB expanded its bond-buying program from its initial end date of September 2016 to March 2017, but the monthly purchase size of bonds was kept unchanged, staying at 60 billion euros a month. Meanwhile, the negative deposit rate of -0.2% was lowered further to -0.3%, and the lending rates remained unchanged at 0.05%. This policy decision fell short of investors’ expectations, who had anticipated more a aggressive stimulus measure from the ECB.

As a result, the euro surged 3.2% against the US dollar, making European exports more expensive in global markets. Also, US stocks fell on the day as the Federal Reserve’s Chairperson, Janet Yellen, maintained her hawkish stand about a US rate hike.

Additionally, the yields on government treasury bonds rose. Note that bond prices and yields have an inverse relation. Gold gained on the day due to a weakened US dollar and rising volatility. Oil also gained on the day, ahead of OPEC’s meeting on Friday, December 4.

However, the rise in oil prices didn’t boost the energy sector on Thursday. On the contrary, the energy sector was the second biggest decliner after the healthcare sector. Stocks of Chesapeake Energy (CHK), Southwestern Energy (SWN), Kinder Morgan (KMI), Marathon Petroleum (MPC), and Williams Companies (WMB) fell 11.8%, 7.5%, 6.8%, 6.2% and 6.1%, respectively, on December 3.

Let’s now move to the performances of the component sectors of the SPDR S&P 500 ETF (SPY) as of December 3, 2015.

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