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Prospects Daily: Euro falls to 14-month low on ECB rate cuts, ECB unveils QE measures along with rate cuts, Emerging market activity rises to highest level in more than a year

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Financial Markets
The Euro tumbled and European bonds rallied after the European Central Bank unexpectedly cut its key interest rates and unveiled a new asset-purchasing program. The shared currency depreciated 1.7% against the dollar to $1.2933, sliding below $1.30 for the first time since July 2013, while it dropped 1.3% versus the yen to 136.08. In contrast, European government securities advanced, sending the 10-year note yields from Ireland to Italy to record lows and leaving 2-year rates below zero in eight countries.

Developing-country financial markets extended their gains as the ECB’s rate cuts and further stimulus boosted risk sentiment towards emerging markets. The benchmark MSCI Emerging Markets stock index gained 0.1%, after closing yesterday at the highest level since August 2011, but weak Brazilian stocks limited gains in the stock gauge. The MSCI developing-country index has advanced 9.9% thus far this year, compared to a 5.5% gain for the MSCI developed-market index. Emerging-market currencies strengthened as well with Turkish lira appreciating 1.1% versus the euro and Hungarian fornit gaining 0.4%.

High Income Economies

Highlighting an ongoing rebound in operating conditions through the summer, the Institute for Supply Management (ISM) non-manufacturing index for the U.S. unexpectedly climbed to 59.6 in August from 58.7 in July, on strong output and new business gains.  Economists had expected the index to dip to a reading of 57.5.  

Expecting inflation to ease further in the coming months, the European Central Bank (ECB) cut its key interest rates, after holding steady in the previous two months.  The three main interest rates were lowered by 10 basis points, while economists had expected rate to stay flat.  The refinancing rate was slashed to a record low 0.05% from 0.15%, while the deposit rate was reduced to -0.20% from -0.10%.  The marginal lending rate was cut to 0.3% from 0.4%.

At the same time, the ECB will begin in October two quantitative easing measures as further stimulus for the Eurozone’s sluggish growth and low inflation.  The measures consist of purchases of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector, and euro-denominated covered bonds.

Developing Economies

The emerging markets activity rose to a 17-month high in August, according to surveys conducted by Markit Economics and HSBC. The HSBC emerging market index, a monthly indicator derived from the PMI surveys, rose to 52.5 in August from 51.7 in July, signaling stronger output growth across emerging markets, led by an a sharp increase in service sector activity in China. Three of the four largest emerging markets contributed positively to the overall rise in the index, with the composite output in China and Russia growing at an accelerated rate. India’s private sector activity grew at a slower rate while Brazil’s activity continued to contract.

Latin America and Caribbean

Brazil’s central bank kept the benchmark interest rate at 11% for the fifth consecutive months amid the country’s first recession in more than five years. The decision was in line with market expectations. Annual inflation in August was 6.49 % (compared to 6.51% in July), exceeding the official target of 4.5% for the last 48 months. 

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