European markets show signs of fresh expansion

Share Markets: 

Attention turned to Europe overnight as the European Central Bank (ECB) president Draghi signalled for the first time its quantitative easing program could be expanded.

The comments opened the door for more monetary stimulus and were supportive of sentiment in equity markets.

European equities all rose strongly - the Euro Stoxx lifted 2.2%. US shares also gained, but the rally faded later in the session.

The Dow and S&P500 indices both fell 0.1%, and the Nasdaq dropped 0.4%.

Interest Rates: 

Bond yields globally largely fell in response to the ECB on the prospect of more central bank bond purchases.

Yields on 10-year US treasury notes fell 3 basis points to 2.16%.

The Australian 10-year yield based on bond futures fell 3 basis points to 2.69% and the 3-year fell 2 basis points to 1.76%.

Foreign Exchange:

The euro dropped sharply against the US dollar and against the Australian dollar following Draghi's comments.

However, the AUD was broadly weaker against the US dollar and other major currencies after retail sales disappointed yesterday. 


The improvement in global sentiment gave most commodity prices support. Oil prices were higher, and so were prices of copper.

Gold prices fell, moving inversely with the US dollar. 


Retail sales slipped a disappointing 0.1% in July, the weakest monthly result since May 2014.

The annual pace eased to 4.2% in July from 4.9% previously, and now sits below the long-run average. The weakness in July could reflect a pull forward of spending in June ahead of the end of financial year.

This effect might have been exacerbated by the measure in the Federal Budget to accelerate depreciation.

However, the strength in the recovery for consumer spending and for the non-mining sectors of the economy remains uncertain.

In contrast to the retail sales report, the AiG performance of services index rose from 54.1 in July to 55.6 in August, the highest reading since March 2008.

Sales and new orders sub-indices were both higher, indicating a strong outlook for future activity. 

The trade deficit narrowed $590mn to $2.5bn in July from June. Exports rose 2.1% in July, outpacing a 0.1% rise in imports.

Exports are recovering well after a soft patch earlier in the year. Lower commodity prices are being offset by a weaker Australian dollar and stronger volumes.


The ECB maintained its €1 trillion asset purchase program or quantitative easing unchanged. However, the downside risks to the euro zone area have prompted ECB president Draghi to signal that the ECB could adjust in "size, composition and duration".

Growth and inflation forecasts were downgraded.

The ECB also raised the allowable purchase limit it could buy from 25% to 33% of a sovereign bond issue, to ensure the ECB will meet the current asset purchase target and to create capacity if purchases were to be expanded.

A step-up from its current QE program remains some way off, but it could become a growing possibility as September 2016 approaches (when the current QE program ends) or if downside risks intensify.

Euro zone retail sales rose 0.4% in July, following a 0.2% decline in the previous month. The increase was just short of expectations for a 0.5% lift.

However, the annual pace of growth lifted from 1.7% to 2.7%, which was the strongest in seven months. 

United Kingdom:

The services PMI weakened from 57.4 in July to 55.6 in August, the lowest in two years. Taken with a fall in the manufacturing PMI, the overall composite index fell from 56.6 in July to 55.1 in August.   

United States:

The trade deficit narrowed from US$45.2bn to $41.9bn in July, reflecting a 1.1% fall in imports and 0.4% increase in exports.

The US trade position is expected to come under pressure due to the appreciation of the US dollar in coming months.

Initial jobless claims edged up from 270k to 282k for the week ending 29 August. As a trend, claims have edged higher over the past month.

However, claims remain low (the 4-week moving average stood at 275.5k) and still suggest that the labour market will continue to tighten. 

The Markit Services PMI was revised from 55.2 to 56.1 in the final estimate for August, and now indicating an improvement in activity from July.

In contrast, the ISM non-manufacturing index declined from 60.3 in July to 59.0 in August, but both surveys are suggesting a healthy rate of expansion in the services industry. 

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