Markets Tumble on Draghi's Refusal to Print

On Thursday, the European Central Bank opted to drop its benchmark interest rate by 25 basis points to 1.00%. The ECB's president, Mario Draghi, cited worsening economic conditions in the Eurozone as the primary motivator behind the rate cut. This comes in contrast to Draghi's predecessor—Jean-Claude Trichet—who hiked rates twice earlier in the year on concerns over inflation in the Eurozone. In the following press conference, Draghi initially made comments that propelled the market strongly higher. He unveiled a program that would have the ECB making 36-month loans to European banks, and predicted that while inflation may stay above 2%, it would moderate in coming months. Traders may have interpreted his comments as being inflationary. Gold spiked higher in the premarket as US equity futures rallied. Yet, anyone taking that stance might have been burned within minutes. Roughly halfway through Draghi's press conference, the central banker changed tone. Draghi stated that he did not foresee further bond purchases. He went on to say that comments he had made last week might have been misinterpreted. Draghi explained that current treaties made debt monetization illegal, and the ECB was forced to respect the legality of these agreements. Those comments may have sent the market down sharply lower, as futures quickly reversed course and traded into the red. Gold also moved lower, falling from around $1750 an ounce to below $1720. Investors may have been anticipating a program of easing on the part of the ECB, similar to the programs of quantitative easing unveiled by the Federal Reserve in recent years. Thus, although Draghi was willing to slash rates (a generally positive event), markets may have been disappointed by a failure on the part of the ECB to print euros. Ultimately, if the ECB is unwilling to purchase the bonds of troubled Eurozone states, problems may return with a vengeance at some point in the future. For its part, the EUR/USD pair was slammed on Thursday. The pair dropped from an early morning high near $1.345 to a level around $1.33. The US dollar index rallied sharply, up almost 0.50% close to $79. Commodities slumped, as silver dropped nearly 3% and crude oil fell back below $100 per barrel. Ultimately, Thursday's action may pale in comparison to what Friday may bring. The buildup to Friday's Eurozone summit has thus far been intense—expectations are riding high on the outcome. If positive news emerges, the euro could rally strongly, while negative news could lead to a sharply weaker euro.