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GLOBAL MARKETS-Bond yields, stocks drop after Draghi comments

Published 13/11/2015, 06:09 am
© Reuters.  GLOBAL MARKETS-Bond yields, stocks drop after Draghi comments
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(Adds close of European bond, stock markets)

* Wall St falls, dragged by energy, materials shares

* Commodities slide sharply on weak world demand

* US-German 5-year bond yield spread widest since 1999

By David Gaffen and Herbert Lash

NEW YORK, Nov 12 (Reuters) - U.S. and European government bond yields dropped on Thursday on indications of further monetary policy stimulus by the European Central Bank, while stocks fell, led by sectors most influenced by weak global demand trends.

The dollar had rallied against the euro after remarks by ECB head Mario Draghi, who warned that price inflation, a key measure of economic health, was lagging. urn:newsml:reuters.com:*:nL8N1372CS

But the currency markets shifted after St. Louis Fed President James Bullard, generally a more hawkish member of the U.S. central bank, suggested industrial nations may be headed into an era of permanently low rates. urn:newsml:reuters.com:*:nN9N122017

"Should we find ourselves in a persistent state of low nominal interest rates and low inflation, some of our fundamental assumptions about how U.S. monetary policy works may have to be altered," Bullard said in prepared remarks.

That drove buying in the U.S. Treasury market, where yields have been steadily rising in anticipation of a Fed rate increase in December. Losses on Wall Street stocks revived safe-haven demand for government debt.

Bullard's comments come on a day when several Federal Reserve members, including New York Fed President William Dudley, are scheduled to speak. He said the policy-setting Federal Open Market Committee needed to "think carefully" about whether the time was right to begin tightening monetary policy.

OIL DROPS

The dollar's recent gains have helped push crude oil to lows not seen since late August and copper to a six-year low.

Oil was down again Thursday, with crude prices dropping more than 2 percent. U.S. crude CLc1 fell $1.09 to $41.84 a barrel, and Brent crude LCOc1 slipped $1.31 to $44.51 a barrel.

Weak global demand has sapped interest in commodity markets.

The U.S. stock market also fell, dragged by energy and materials shares which were directly affected by global demand.

The MSCI all-country world index .MIWD00000PUS lost 0.66 percent, with the heaviest losses in European shares. The pan-European FTSEuroFirst 300 .FTEU3 closed down 1.61 percent at 1,470.05 points.

The Dow Jones industrial average .DJI fell 163.45 points, or 0.92 percent, to 17,538.77. The S&P 500 .SPX dropped 14.6 points, or 0.7 percent, to 2,060.4 and the Nasdaq Composite .IXIC lost 19.63 points, or 0.39 percent, to 5,047.39.

Copper futures in London hit a 6-year low of $4,800 a tonne CMCU3 and platinum hit its lowest since late 2008 at $868.75 an ounce XPT= .

POLICY DIVERGENCE

In an address to the European Parliament, Draghi said inflation dynamics had somewhat weakened and a "sustained normalization" of inflation could take longer to achieve than thought. urn:newsml:reuters.com:*:nF9N12D00G

"Although the debate at the ECB seems to be far from over, the fact that Draghi made these comments in a high-profile setting suggests that he is confident that the majority of the ECB council will support him," said Holger Schmieding, chief economist at Berenberg Bank in London.

German 10-year yields rose 2 basis points to 0.607 percent DE10YT=TWEB . All other euro zone yields were down on the day.

Expectations for ECB easing are in sharp contrast to those for U.S. monetary policy. Most investors are betting that last Friday's stellar U.S. employment report has set the seal on the Federal Reserve raising rates at its meeting next month.

Illustrating that divergence, the gap between U.S. US5YT=RR and German five-year yields DE5YT=RR rose to 181 basis points at one point, the highest since 1999.

The dollar index .DXY , which tracks the greenback against a basket of six major currencies, fell 0.23 percent to 98.784.

The euro EUR= rose 0.22 percent to 1.0743, while the yen JPY= fell 0.02 percent to 122.82.

(Editing by Nick Zieminski and Bernadette Baum)

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