ECB decision, US Fed comments to weigh on markets

Markets are likely to trade weak on Friday after the European Central Bank’s (ECB’s) monetary policy measures failed to meet expectation. Also weighing on the sentiment would be Janet Yellen’s comments on the recent economic data and outlook on interest rates.

The ECB cut deposit rate by 10 basis points to negative 0.3% on Thursday, and said its asset purchase program will also be extended until at least March 2017. Analysts were expecting a raise in the quantum of the asset purchase as well.

At 7:15am Indian Standard Time (IST), the SGX Nifty was trading 0.5% down at 7,844 levels.

“Our take of this meeting is that the hawks in the Governing Council have prevented the doves this time to execute a bolder plan. In our opinion this is not necessarily a bad outcome – as we believe that too much focus on trying to weaken the currency could ultimately backfire (either in terms of retaliation by other central banks or in lower commodity prices through a stronger dollar). Moreover, we have often expressed our concerns about the effectiveness and market-distorting nature of negative rates and aggressive asset purchases,” said Elwin de Groot, Senior Eurozone Strategist at Rabobank International in a note.

“At the same time, the ECB may now be taking a gamble. Whereas in the past it has shown a preference to err on the side of caution and try to be ahead of the markets, it is now in the backseat again. If the economic fundamentals and inflation improve, the ECB still wins, but if those fundamentals don’t improve sufficiently quickly, there is now a bigger risk that long-term inflation expectations would slip again. With opposition in the Governing Council obvious, any further easing measures could be expected to be facing delays,” he adds.

On the other hand, US Fed chair Janet Yellen said in a testimony before Congress that economic data since October backs the central bank's expectations of an improved job market. She added the bank will need to be cautious about raising rates form near zero, but added that - even after an initial increase - Fed funds rates would remain accommodative.

The Dow Jones Industrial Average ended 252 points, or 1.42% lower at 17,478 while the S&P 500 was down 30 points, or 1.44%, at 2,049. The Nasdaq lost 86 points, or 1.7%, at 5,038.

Asian shares slipped while the euro retained gains on Friday. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.2%, while Japan's Nikkei dropped 1.5%. Straits Times, Taiwan Weighted, hang Seng, KOSPI and Shanghai Composite also lost 0.6% - 1%.

On Thursday, Indian equities had recorded their biggest single-day percentage drop since November 18, 2015. The Sensex ended at 25,886, 231 points down or 0.9% lower while Nifty 50 closed at 7,864, 67 points lower, or 0.8% down.

With Reuters inputs