European stocks fell and the euro slipped against the dollar after comments by European Central Bank President Mario Draghi were laced with caution, tempering the positive sentiment following Wednesday's coordinated liquidity moves by central banks.
Draghi, speaking to the European parliament on the joint measures by banks, warned that downside risks to the economic outlook have increased and he also cautioned that dysfunctional government bond markets in several euro-area countries are hampering single monetary policy. In addition, the ECB's president said the central bank's bond purchases can only be limited.
Cyclical stocks were leading the declines, with investors taking advantage of the strong gains in the previous session and taking profits. Cyclical sectors, which are sensitive to the economy, all rose strongly on Wednesday after the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank agreed to lower the pricing on existing temporary U.S. dollar liquidity swap arrangements by 50 basis points.
However, despite the action, the underlying issues affecting the European sovereign debt crisis remain unsolved. Indeed, Goldman Sachs said in the near term, it expects European equity markets to fall further as recession is priced in and earnings downgrades accelerate. The investment bank announced a more defensive stance in its portfolio, downgrading the banking, industrial goods and services, basic resources, food and beverages, and autos sectors. It upgraded technology and health care.
Meanwhile, euro-zone purchasing managers index manufacturing data were in line with expectations, confirmed at 46.4 in November. The index is at its lowest level since June 2009 but still 13 points higher than its record low. The data had little bearing on markets.
Earlier, Asian stock markets surged Thursday following the moves by major central banks Wednesday to lower dollar funding costs for European banks and after the People's Bank of China cut its reserve requirement ratio for the first time in over three years.
Hong Kong's Hang Seng Index advanced 5.6%, while China's Shanghai Composite advanced 2.3%. Japan's Nikkei Stock Average rose 1.9%, Australia's S&P/ASX 200 climbed 1.9%, and South Korea's Kospi Composite jumped 2.3%.
The PBOC Wednesday cut the reserve requirement ratio for banks by 50 basis points, in a move that many believe signals the beginning of a monetary easing cycle in China.
However, some speculation that the PBOC's action was a preemptive move ahead of a weak manufacturing sector reading appeared to ring true after data earlier Thursday showed China's official manufacturing PMI slipped into contraction territory for the first time in over two and a half years. The index fell to 49.0 in November from 50.4 in October.
In foreign exchange markets, the euro fell against the dollar following the comments made by Draghi.
At 0910 GMT, the single currency was at $1.3448 against the dollar, from $1.3446 late Wednesday in New York, and the dollar was at Y77.69 from Y77.63.
Spot gold was at $1,743.20 U.S. a troy ounce, down $2.30 from its New York settlement on Wednesday. Nymex January crude oil futures were up just nine cents at $100.45 U.S. a barrel and Brent futures were down 35 cents at $110.17 U.S. December bunds were up 0.28 to 134.10.
On the economic front Thursday, U.K. PMI manufacturing data for the U.K. were expected to be released Thursday morning. Bond auctions in Spain and France will also be eyed.
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