FOMC minutes and speech causes positive ripple-effects through world markets.
The impact of Ben Bernanke’s speech, given yesterday after the minutes of the last and latest FOMC meeting were published, the BOJ statements regarding Japanese stimulus combined with news that China will look towards means to re-ignite their economy after a spate of recent poor data, caused positive ripple-effects throughout the Asian trading session and through the early part of the London and European trading session.
Asian shares rallied as did those on the Australian market the ASX 200. Metals also soared, whilst the dollar continued the slump which saw a major reversal in sentiment develop versus its major currency peers after yesterday’s FOMC minutes and the corresponding press conference. The major European bourses are up, whilst the DJIA and Nasdaq look set to open up at the bell in New York.
Bernanke backed (and committed to) more monetary stimulus for the USA. As with many of the dramatic event driven policy situations we’ve experienced over recent years, certain words and narrative become the ‘hook’ to offer up clues to investors as to where policy may be headed. The unequivocal broadcast of; “highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” left investors in no doubt as to how the USA economy will be driven forward in the short to medium term; bond buying/quantitative easing will continue aggressively until the Fed believes that “highly accommodative” stimulus can be withdrawn.
Bundesbank head swims against the tide of central banks ‘doves’
Jens Weidmann, head of the Bundesbank and Germany’s man on the ECB governing council, is not prepared to ‘take one for the team’ of global central bankers obligated to infinite monetary stimulus. He will inform an audience in Munich that the ECB has not “tied itself to the mast” with its new forward guidance on interest rates.
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Weidmann, said the ECB’s commitment last week to keep its interest rates at record lows, or even cut them further, was justified by a subdued inflation outlook and a weak economic environment. He added that the ECB’s monetary policy stance was conditional on economic developments;
“It is not an absolute advanced commitment of the interest rate path. The ECB Council has not, like Odysseus simply tied itself to the mast.”
ECB monthly bulletin
The ECB has released its monthly bulletin within the last hour, it includes more details of the ECB’s deliberations at last Thursday’s governing council meeting. The report expands on its unprecedented move into “forward guidance”, by declaring that interest rates would remain at “present or lower levels for an extended period of time”.
“The extended period of time over which the Governing Council currently expects the key ECB interest rates to remain at present or lower levels is a flexible horizon which does not pre-specify an end-date but is conditional on the Governing Council’s assessment of the economic fundamentals that determine underlying inflation.”
The translation appears to be that the ECB is unwilling to commit to a fixed target or deadline, but is still monitoring its forward guidance to its primary mandate of price stability. The report also suggests that further rate cuts, from the current record lows, will be considered. The ECB states that the guidance was released “before exhausting the scope for further reductions in the key ECB interest rates”.
Market snapshot at 10:30 am (UK time)
Global equities had lost more than $3 trillion in value and 10-year USA Treasury yields surged circa 70 basis points since May 22nd, when Ben Bernanke indicated the central bank may reduce its bond-buying program as and when economic risks subside.
The MSCI All-Country World Index increased one percent to 367.16 in the London session. The Shanghai Composite Index rose 3.2 percent, extending yesterday’s 2.2 percent advance. The measure is set for its biggest two-day gain since January 2012 on speculation the government will take measures to bolster economic growth after data yesterday showed imports and exports unexpectedly fell in June. The UK FTSE is up 1.02%, the DAX is up 1.21%, the STOXX 50 is up 1.22%.
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Standard & Poor’s 500 Index futures have risen one percent after the gauge climbed to within 1 percent of its record yesterday. The U.S. stock benchmark has recovered losses following a 4.8 percent drop from June 19th to 24th and is up 16 percent in 2013. Treasury 10-year futures contracts gained the most in 15 months. The S&P GSCI gauge of commodities advanced for an eighth day, led by metals.
The Dollar Index has slumped 1.2 percent, yen has strengthened 0.5 percent to 99.22. The yen was little changed at 129.40 per euro after Japan’s central bank announcement. The BOJ also kept its 2015 financial year core inflation forecast at 1.9 percent. Japan’s 10-year yield slid 3.5 basis points to 0.820 percent, poised to decline for a third day.
The S&P GSCI gauge of 24 raw materials advanced 0.3 percent to its highest level in more than three months, set for its longest winning streak since November 2010. Gold rose 2 percent to $1,284.80 an ounce, gaining for a fourth day in the best run since April. Silver jumped 3.3 percent to $20.0320 an ounce, also climbing for a fourth day in the longest rally since February.
Copper increased 2.9 percent to $7,020.25 a metric ton, while nickel, lead, aluminum and tin all climbed at least 1 percent on the London Metal Exchange. Copper gained 1.4 percent yesterday due to imports to China, the world’s largest user of industrial metals, climbing to their highest since September.
The crisis in Egypt combined with low inventories and favourable economic prints from the USA, has caused West Texas Intermediate crude to rise 0.5 percent to $107.02 a barrel, gaining for a third day. On Wednesday the contract settled at its highest level since March 27, 2012.