The outstanding news event of the day was undoubtedly the revelation that major central banks around the world will now cooperate to offer three-month U.S. dollar loans to major commercial banks in order to ensure that money markets won’t ‘freeze’ as a consequence of Europe’s sovereign debt crisis. This co-ordinated and concerted effort could have been hatched during last weekend’s G7 meeting after which announcements were made that agreements had been reached (in relation to a solution), but no details were released or made public.
A statement from the ECB read; “The European Central Bank has decided, in coordination with the (U.S.) Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three U.S. dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year.”
In some respects this plan is a revisit of a successful procedure last instigated at the height of the global financial crisis in 2008-09 when the ECB regularly held three-month dollar operations, then ‘calmer’ conditions arrived allowed the ECB to phase them out. The ECB also held a one-off, three month operation in May 2010 timed with Greece’s first international bailout. The announcement gave a huge boost to major indices in Europe and USA. Banking shares in France recovered some of their huge losses suffered due to downgrades from Moody’s earlier in the week. Investors ignored the disappointing data showing new claims for U.S. jobless rose last week and factory activity contracted this month.
The 30 year U.S. Treasury bond fell more than a point, the prospect of the window of loose monetary policy, combined with higher inflation prompted investors to dump long bonds. The 30 year bond was at a yield of 3.34 percent. The benchmark 10 year U.S Treasury note fell to a yield 2.08 percent. Crude oil rose more than $3 a barrel during the afternoon session due to a combination of the rally in European equities, the weaker dollar and improved optimism. Brent crude for October delivery, expiring Thursday, was up $2.79 at $115.19 a barrel. Spot gold prices fell circa 2% ($37) to $1,782 an ounce.
The schizophrenic nature of the Merkel, Sarkozy, Greek Prime Minister George Papandreou axis continues to confuse. Earlier in the day both Merkel and Sarkozy gave their full support to Greece and insisted they would remain in the Euro, however, in late afternoon Ms Merkel again voiced her objections to common eurobonds as a long term solution. This announcement may have come after the central banks’ dollar solution was broadcast as such perhaps the eurobond initiative is now temporarily removed from the table, if so this will have provided some relief to Merkel currently entangled in a political publicity battle domestically.
Reuters are reporting that the odds of the UK moving towards QE2 have escalated. A second bout of quantitative easing, (printing money), would be controversial. Britain’s substantial home-grown problems are being exacerbated by crisis in the euro zone. UK unemployment passed 2.5 million in the three months to July. Activity in services, the bulk of the economy, almost contracted in August. Wages, up just 1.7 percent in the past year, are falling fast in real terms, impoverishing consumers and threatening deflation. And exports are stalling: the euro zone is the UK’s main trade partner.
The Bank of England’s monetary policy committee member Martin Weale has stated that the risk of UK recession has increased. In an exclusive interview with Reuters Mr. Weale suggests the reasons why he’s arrived at that conclusion. The outlook for the economy has worsened in recent weeks and the risk of a double-dip recession is higher than in July, the Bank of England policymaker stated.
However, inflation remains a problem and not all recent news pointed towards a significant undershoot of the Bank’s inflation target in the medium-term horizon making it necessary to warrant more quantitative easing. The exclusive Reuters interview is here..
Data releases to be mindful of for London’s opening include the Eurozone labour costs and trade balance for July. The ftse daily future is currently positive suggesting an open of 0.5%+. this follows a positive close of 2.11%. Similarly other Euro bourses closed up. The DAX closed up 3.15%, the CAC closed up 3.27%, the STOXX closed up 3.47%, all bourses looking positive for tomorrow morning on the daily futures.
09:00 Eurozone – Current Account July
10:00 Eurozone – Labour Costs 2Q
10:00 Eurozone – Trade Balance July
14:00 US – TIC Flows July
14:55 US – Michigan Consumer Sentiment Sept