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Dow Plunge Deepens as ECB’s Draghi Sparks Eurozone Recession Fears

Last Updated September 23, 2020 12:51 PM
Sam Bourgi
Last Updated September 23, 2020 12:51 PM

The Dow and broader U.S. stock market headed for steep losses on Thursday after European Central Bank (ECB) President Mario Draghi gave his clearest signal yet that interest rates were headed lower. Instead of reassuring investors, the outgoing ECB president invoked fears that the Eurozone economy was barrelling toward recession.

Dow Jones Sinks; S&P 500, Nasdaq Follow

All three major U.S. indexes declined on Thursday, mirroring a tepid pre-market for Dow futures. The Dow Jones Industrial Average was off by as much as 208 points before paring losses later in the day. As of 3:09 p.m. ET, the blue-chip index was down 177.64 points, or 0.65%, to 27,092.33.

Dow Jones
Dow Jones Industrial Average heads for triple-digit loss on Thursday. | Source: Yahoo Finance.

The broad S&P 500 Index of large-cap stocks fell 0.63% to 3,000.59. No sector reported growth and ten of the 11 registered declines. Energy stocks led the downtrend, falling 1.3% on average.

The technology-focused Nasdaq Composite Index declined 0.9% to 8,245.80.

After three straight declines, the CBOE Volatility Index rebounded sharply on Thursday, reaching a session high of 13.54 on a scale of 1-100 where 20-25 represents the historic average. At last check, VIX was up 6.1% to 12.81.

ECB Resorts to Old Tactics

The European Central Bank (ECB) is planning a new cocktail of stimulus measures to help jump-start a moribund economy and could be ready to act as early as September. That was the key takeaway from the central bank’s latest policy announced on Thursday.

The Frankfurt-based central bank expects interest rates to remain “at their present or lower levels” at least through the first half of next year.

In a press conference shortly after the meeting, ECB President Mario Draghi said: “a significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favorable and support the euro area expansion.”

Rather than reassure investors, Draghi’s comments seemed to imply that the regional economy was weaker than initially feared. He blamed trade wars and the prospect of a hard Brexit for the bleak outlook.

Eurozone economy
Eurozone economic output has slowed significantly over the past year-and-a-half. | Source: tradingeconomics.com

Unfortunately, there’s no guarantee that more stimulus will lead to a sustained increase in gross domestic product (GDP) or that inflation will come in line with the ECB’s objectives. After all, years of quantitative easing and negative interest rates haven’t helped the Eurozone regain its footing. Since the financial crisis, the single-currency bloc has suffered through multiple debt crises, declining manufacturing output, and waves of populist outbreaks across its periphery.

The Eurozone has staved off recession the past five years, but growth hasn’t exactly been stellar. After a comparatively strong 2017, the economic expansion hit a major speed bump last year. GDP has failed to grow above 0.5% in each of the last five quarters.

The European Commission will release preliminary second-quarter GDP data next week. Based on the consensus forecast, the Eurozone is headed for another quarter of 0.4% growth.

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