NEW YORK (Reuters) - The euro slumped late on Wednesday and safe-haven U.S. government bonds rallied after the European Central Bank abruptly canceled its acceptance of Greek bonds in return for funding, putting more pressure on Greece to reach new reforms.
The move, which means that the Greek central bank will have to provide its banks with tens of billions of euros of additional emergency liquidity in the coming weeks, was a response to what many in Frankfurt saw as the Greek government’s abandoning of its aid-for-reform program.
The action was unexpected and fueled a drop of 1.3 percent in the euro EUR=, while the U.S. dollar index .DXY extended its gains and jumped 0.9 percent, nearly erasing its biggest one-day fall since October 2013 in Tuesday's session.
In an indication of how Greek equities might trade on Thursday morning, the Global X FTSE Greece (GREK.P) exchange-traded fund dropped 10 percent in the last half-hour of the New York trading session.
“I would imagine tomorrow Greek bonds sell off hard, and the Greek stock market gets hit hard, especially the banks,” said Marc Chandler, chief currency strategist at Brown Brothers Harriman in New York.
The news contributed to a decline in U.S. equities toward the end of the trading day, though Wall Street was also affected by losses in energy prices. U.S. crude futures CLc1, which had risen almost 20 percent over the previous four sessions, fell 8.4 percent. Brent crude LCOc1 fell 5.9 percent.
The benchmark 10-year U.S. Treasury note US10YT=RR rose 3/32 in price, putting the yield at 1.7675 percent, but before the Greece news the yield was at 1.81 percent.
“I think this is a real act of vengeance by the ECB and the EU and I think it’s a shame,” said Mark Grant, managing director at Southwest Securities in Fort Lauderdale, Florida. “You saw the stock market, which had been up over 100 as soon as this hit the wires, drop down to a slight positive; Bonds go from being down a point to up a point.”
“It’s just the reaction of the American markets, and when people begin to think about this tomorrow (in Europe), they’re going to get hit as well.”
The Dow Jones industrial average .DJI rose 6.62 points, or 0.04 percent, to close at 17,673.02, the S&P 500 .SPX lost 8.52 points, or 0.42 percent, to 2,041.51, and the Nasdaq Composite .IXIC dropped 11.04 points, or 0.23 percent, to 4,716.70.
The Dow was supported by Walt Disney Co (DIS.N), which jumped 7.6 percent a day after reporting results, while a decline in biotechnology shares dragged on the Nasdaq, led by Gilead Sciences (GILD.O), which slumped 8.2 percent a day after the drugmaker reported steeper-than-expected discounts on its hepatitis C drugs to health insurers and other group payers.
Shares in Europe .FTEU3, which closed prior to the ECB's announcement, ended up 0.6 percent. A measure of world stock markets .MIWD00000PUS was up 1.3 percent.
The U.S. Labor Department is due to release its jobs report for January on Friday.
In precious metals trading, gold XAU= rose 0.3 percent while silver XAG= was up 0.4 percent. Copper CMCU3 rose 0.3 percent after surging 3.5 percent on Tuesday in the biggest one-day move since May 2013.
Additional reporting by Chuck Mikolajczak, Caroline Valetkevitch and Richard Leong; Editing by Leslie Adler, Dan Grebler and Andrew Hay