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ECB & US Jobs Report Drive Strong Finish to Week

Market Digest – Week Ending 6/6

After a relatively slow start to the week, global stocks rallied on Thursday and Friday following new ECB measures and a strong US jobs report. The S&P 500 finished the week at another all-time high. 10-year Treasury yields rose and gold was relatively flat. Mario Draghi’s comments on Thursday drove a temporary decline in the Euro, but it quickly recovered and ended the week flat against the Dollar.

Weekly Returns:

S&P 500: 1,949 (+1.3%)
FTSE All-World ex-US: (+1.4%)
US 10 Year Treasury Yield: 2.59% (+0.12%)
Gold: $1,253 (+0.1%)
USD/EUR: $1.364 (+0.1%)

Major Events:   

  • Tuesday – Following a solid recovery in April, US auto sales posted another strong month with growth up 11% in May.
  • Wednesday – Standard & Poor’s placed BNP Paribas’s credit rating on negative watch, citing possible fallout from the $10 billion fine imposed by US authorities.
  • Thursday – SEC Chairwoman Mary Jo White proposed new rules to regulate high frequency trading firms.
  • Thursday – Rising home values and stock prices helped push US household net worth to a new record in the first quarter, according to a report by the Federal Reserve.
  • Friday – US job growth exceeded expectations in May, while the unemployment rate remained flat at 6.3%.

Our take:

On Thursday Mario Draghi announced new measures in an attempt to spark bank lending and combat low inflation. Specifically, he cut the target rate from 0.25% to 0.15%, said he would offer cheap four-year loans, and set the interest rate on overnight bank deposits at -0.1%. The last move was a bit more unconventional, and essentially charges banks to hold money with the ECB.

The big question is whether these moves are enough. They were made partly in response to a recent inflation reading, which registered at 0.5%—a new low in a four-year downward trend. This has led to fears of deflation, which could choke off any potential recovery.

The market reaction was mostly positive, albeit muted. Gains were primarily concentrated in US stocks and Emerging Markets. In truth, we don’t think these measures will do much to ignite growth, but they’re a step in the right direction. Additional measures could be necessary to bolster the sluggish, and fragile, Eurozone economy.

Conversely, a few economic data points came in better than expected in the US. While none were earth shattering, they help alleviate fears that Q1’s negative growth is part of a longer term trend.

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