Lackluster demand for the ECB's new ultra-cheap loans on Thursday boosted bets it will have to overcome reservations about sovereign bond buying, and left markets eyeing the widening policy divergence from the United States.
The U.S. Federal Reserve's outlook for rising interest rates had already illustrated the diverging path from other advanced economies, pushing the dollar to a six-year high against the yen, but it was underscored even more firmly in Europe as the ECB opened its liquidity taps again.
Two-and-a-half years on from its last injection of long-term funding that pushed a trillion euros into Europe's markets, banks this time took a much more restrained 83 billion that was well below the 133 billion traders had been expecting.
The launch of the scheme is the central plank of the ECB's efforts to coax reluctant banks to lend more and fire up the bloc's flagging economy. Alongside a yet-to-be-detailed asset purchase program, it hopes to hit the 1 trillion mark again.
Berenberg’s chief economist Holger Schmieding called it "a disappointing result for the ECB," and said "the low takeup ... will likely strengthen the voice of those who argue that, to really make an impact, the ECB would have to buy major amounts of sovereign bonds."
Some top ECB members have already hinted at bond buying and the euro EUR= and German bond yields nudged down and European shares .FTEU3 climbed as bets on such a move gained traction.
With Scottish voters hitting the polls on what looked likely to be an extremely close vote on independence it also relieved some of the pressure on the FTSE .FTSE in London.
France's CAC40 .FCHI and the Dax .GDAXI in Germany jumped 0.7 and 1 percent respectively.
While the ECB is reluctant to overstep rules that prevent it from financing governments by buying sovereign debt, it could do so to ensure inflation - currently just above zero in the euro zone - goes back to near 2 percent.
Spanish, Italian and Portuguese stocks and bonds all extended earlier gains and QE bets bubbled, while futures prices also pointed to a solid 0.4 percent rise for the S&P 500 ESc1 when Wall Street opens.
FED GONE
The Fed had maintained language on Wednesday suggesting that rate hikes would not happen for a "considerable time," but it also indicated its policymakers think it could raise borrowing costs faster than expected when it starts moving. [TOP/CEN]
The upshot was that the euro EUR= skidded to a 14-month trough before stabilizing in Europe, while gold XAU= hit an eight-month low as the dollar swept higher across the board, a move many investors have been itching to wager on all year.
"The Fed clearly signaled overnight that although it is not imminent, they are increasingly confident they will start raising rates next year," said Lee Hardman, a strategist with Bank of Tokyo-Mitsubishi UFJ in London.
Asia's reception had been mixed, with MSCI's index of ex-Japan Asian shares falling to 12-week lows, on the specter of rising U.S. rates and slower economic growth in China, though a weak yen saw Japanese shares .N225.TOPX jump. [.T]
The dollar spent European trading almost 1.4 percent higher against the yen than 24 hours earlier, at 108.67 yen JPY=.
Futures markets <0#FF:> still lean more towards a Fed rate move in June. But whatever the timing, U.S. rates do seem certain to be heading higher while central banks in the euro zone and Japan remain committed to super-easy monetary policy.
Bond investors reacted with more calm than those in currency markets, and nudged yields on the benchmark U.S. 10-year note US10YT=RR up a modest 2 basis points to 2.62 percent.
Still, a rise in two-year yields US2YT=RR to 0.57 percent widened their premium over German debt to 63 basis points, the fattest margin since early 2007.
SCOTS AWAY?
With the Fed out of the way, the next big test for markets will be Thursday's referendum on Scottish independence.
Five surveys - from pollsters YouGov, Panelbase, Survation, Opinium and ICM - showed support for independence at 48 percent, compared with 52 percent for maintaining the union. It gave sterling a mild lift and it was last at $1.6334 GBP=D4, having been as low as $1.6052 earlier in the month.
The surveys also showed though that as many as 600,000 voters remained undecided, making the vote far too close to call. Polling stations close at 2100 GMT ( 5 p.m. EDT) and a result is expected early on Friday.
In commodities, the rise of the dollar was a dead weight on prices. Gold steadied at $1,223.60 an ounce XAU= after having touched an eight-month trough of $1,216.01.
Oil prices were further pressured by a government report showing U.S. crude stocks rose sharply last week. Brent crude LCOc1 and U.S. crude Clc1 were both down roughly 0.2 percent at $98.80 a barrel and $94.30, respectively.
© 2017 Reuters All rights reserved.
