With the US out for the 4th of July holiday we might normally expect markets to be fairly quiet but that was not to be overnight as both the Bank of England and the ECB sought to deal directly with the recent uptick in bonds by committing to low rates for an extended period.
These comments ignited a sell off in both the Euro and the Pound and also kicked stocks higher and helped take pressure of European interest rates.
Central Bankers deal themselves in the game again
It is a really interesting time for central bank watchers at the moment, we have the Fed warning of taper driving the USD and US bonds higher, we have the RBA Governor supposedly cracking jokes in an effort to get the Aussie down and now we have the ECB and BoE fighting back against the impact of the Fed’s taper talk on interest rates in their jurisdictions.
Turning first to the Bank of England in an unusual move it released a statement even though rates didn’t move and in it the BoE dealt directly with the Fed induced increase in interest rates and unsurprisingly given this is new Governor mark Carney’s first meeting also signaled that his beloved forward guidance would or could commence soon. The statement said,
Since the May Inflation Report, market interest rates have risen sharply internationally and asset prices have been volatile…
The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds.
This knocked Sterling for six and it has broken near term support and head back down toward 1.48 it seems.
Across the Channel ECB President Draghi also left rates unchanged but he too at the Presser after the meeting reiterated that rates would be low for some time. From Reuters this morning,
“The Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time,” Draghi told a news conference after the ECB left interest rates at 0.5 percent, calling it a “very significant step”.
“50 basis points is not the lower bound,”
Clearly both Central Bank heads recognise their own internal problems economically and that their economies are not on the same path as the US economy appears to be at the moment and are seeking to quieten the horses. the Euro also came under pressure falling to a low of 1.2882 before rallying a little back above 1.2900. Euro looks biased to support at 1.2805 and if that breaks 1.2740, 1.2625. If this lower level breaks then it is 1.21.
My view is both GBP and EUR are headed lower.
On the Aussie it rallied as I suggested it might yesterday morning but this was in no small part as a result of comments made at a speech by RBA Deputy Governor Phil Lowe that his boss Glenn Stevens was making a joke the day before when he noted the Board had though long and hard about keeping rates on hold. It is amazing, if it is true, that after so long in the job that Stevens would make such a faux pas – it is equally amazing that Lowe would then seek to clarify as this chain of events caused some serious money loss for people given the huge moves it causes on stocks, interest rate and currency markets. It even caused the ANZ’s Chief Economist Warren Hogan to move his rate cut call forward to next month on Wednesday and then move it back out after the apparent back flip yesterday – not for a second am I criticising the ANZ because as they said in their note it was an entirely consistent thing to do to reverse the rate cut call on Lowe’s clarification – but note to Martin Place “isn’t there enough volatility in markets at the moment without you blokes adding to it?”
Stocks on a tear but await non-farm payrolls tonight
Now of course in hosing down expectations in the UK and Europe that the respective central banks were on a similar path to the Fed both the BoE and the ECB lit a rocket under the bourses of Europe. The FTSE was 3.08% higher, the DAX rose 2.10%, the CAC was 2.89% higher while stocks in Milan and Madrid rose 3.44% and 3.07% respectively.
But all of this could be washed away, or not, by this time tomorrow morning given the importance that non-farm payrolls still holds in the global economic and trading psyche. FX Street’s survey shows an expectation of 170k for tonight’s release which given the strong ADP Private sector survey two nights ago just might be so
Commodities were largely unchanged. Oil still above $100 Bbl, Gold around $1250 oz and Copper at $3.15 lb.
Today we all await the non-farm payrolls in the US but before that we have AiG Performance of Construction and ANZ Job ads in Australia, French Trade and German factory orders.