Markets enjoyed a relief rally yesterday as we mentioned in yesterday’s comment and investors are starting to become more optimistic that central bankers are going to get the money printing machines going again.
The ECB did not answer their prayers as they announced nothing more than an extension of the LTRO program without announcing an all out new round of liquidity provision, yet investors kept buying equities and this morning we’re seeing further buying at the open. Increasing speculation that policy makers are getting ready to bolster economic growth through another round of monetary easing sparked a sharp rally in the Dow Jones yesterday. The signal was given by the ECB President Mario Draghi saying ‘officials will act as the euro area’s outlook worsens’.
But also as mentioned one can’t help thinking that we’ve seen it all before and whilst the QE we’ve had in recent years has given a boost to growth in the short term, it’s done little to address the more pressing problems surrounding Europe’s banks. Spain is now a case as they desperately seek to avoid receiving a bailout from the EU and IMF with the sorts of terms attached that have crippled Greece, Portugal and Ireland, but without the cash, which they are reluctant to get from the debt markets, they are taking one step closer to a default themselves. The EU can’t simply pump the money directly into their banks as that would be completely ripping up the rulebook and then what would PIG be thinking if they have to take the hard medicine but others like Spain don’t.
Bottom line is that the eurozone crisis is far from over and this rebound in global stocks may be short lived, especially with the Greek elections around the corner and the unknowns that could potentially follow.
The FTSE is back above the 5400 level this morning as the buying continues and this is seen as a near term resistance level, as mentioned yesterday, having broken through 5350. The next targets for the bulls are 5480 and 5510 whilst the previous resistance at 5350 might provide support.
There’s quite a bit today from an economic calendar standpoint with the UK’s PMI services data due to decline in line with deteriorating manufacturing and construction figures, still expected to remain above the 50 level, but there could be a slightly lower number than the 52.5 expected.
So what can we expect from the BOE today? Well they may well follow in their European counterpart’s footsteps by not bowing to pressure from investors by extending their asset buying program, and they are even more unlikely to reduce interest rates. The effects that their actions have had so far have done little to get the recovery going and more than anything they’ve made things worse by causing higher inflation. The interest rate cuts have also done little to get banks lending to customers at lower rates as they themselves are struggling to meet their greater capital requirements, so one can almost ask what’s the point of another rate cut or further QE now?
Later on today Bernanke speaks to congress and is expected to be grilled over the economy. It will be interesting to see just how much he refers to the eurozone crisis which is something Obama has been doing of recent in his bid to get re-elected.
Although the European Central Bank left its benchmark interest rate unchanged at 1% it managed to boost the risk taking sentiment in the global markets. It did that by joining the other central bankers in considering additional monetary stimulus. Encouraged investors moved back into the euro sending it 129 pips up against the dollar to 1.2577 and this morning the pair is just below there at 1.2550 at the time of writing.
Demand for gold as an alternative asset was visible yesterday on the back of signals that the US and European central bankers will act to kick start economic growth. As a result the precious metal settled $17.3 higher at $1634.2 but retraced after that on profit taking.
Along with other commodities the WTI crude prices benefitted from a weaker greenback, gaining 90 cents to $85.02. It was the impression that central bankers finally agreed to push the same way that spurred buying in the energy sector as well. At the same time, a warning from Iran regarding talks on its nuclear program also provided support. Nonetheless, a bigger than estimated reading in crude oil products inventories kept the advance in check.