Well we didn’t get anything from the Fed, but then as mentioned in yesterday’s comment the markets hadn’t expected too much from Ben Bernanke as he has been less vocal than his counterpart in Europe about the continuing decline of economic growth.
Words and little action were taken, the most surprising of which was the lack of extension to the guidance on policy rates for a further six months. Such a move has raised questions over whether it is the doves or hawks who are in the ascendancy at the Fed. The only thing that investors came away with was a reiteration of the rhetoric that they will step up to the plate if and when the economic conditions dictate. In reality to act now with further QE might just have been seen as panicking somewhat as investors feel if the Fed does take on QE3 it is more likely to be in September, by which time they will have seen two more non farm payroll figures and more manufacturing and services data to be able to decide whether the US economy really is headed for a fall or not. Most importantly, as mentioned yesterday it also gives them a chance to see what Mr Draghi meant by saying he’ll “do whatever it takes” and whether his actions between now and then (in particular today) will be enough to improve the worsening situation in the eurozone.
Which brings us neatly onto today. First we have the BOE where we can expect more of the same such as comments about how ghastly the eurozone crisis is and “it’s not my fault gov”, but little action as the markets expect Mervyn to do a Bernanke and wait until Draghi’s made his move. Then the big one for today in the form of the widely anticipated ECB meeting. Despite the clear reminders from Germany that the ECB must not act outside of its mandate, the market will be bitterly disappointed not to see something. Spain and Italy’s borrowing costs need immediate attention not just now but over the longer term, and without the bank being able to do full blown QE it needs to come up with other measures to assist the banking system to restore itself and be able to lend to the wider economy. Without a change to its mandate then it’s most likely that the eurozone crisis is here to stay with us for a long time and those who are predicting a meltdown in terms of a break up could well be vindicated.
In the US session yesterday the Dow moved higher to start with in anticipation of the Federal Reserve’s policy meeting as investors’ hopes for decisive action were boosted by weak manufacturing data in China and Europe. However, those bulls didn’t get what they wanted to see and so profit takers came in towards the end of trading. This profit taking hasn’t affected the optimism of European investors this morning as the likes of the FTSE and Dax are in positive territory so far at 5730 and 6760 respectively.
Those expecting the Fed to adopt a more aggressive stance were caught on the wrong side yesterday and had to undo the previously dollar bearish bets. It was a largely neutral speech which left investors wondering if the European Central Bank could do the same later today, promises but no real action. Anyway, the euro was hurt as a result, declining 70 pips to 1.2229 and could come under increasing pressure if indeed the ECB will hold off as well.
Gold lost 14 bucks to 1599 yesterday as market participants realised the widely expected (a few weeks back) monetary stimulus will have to wait. The fact it moved back above the 1600 mark in the overnight trading could suggest the question is not if but when? Probably of crucial importance though, the next non farm report due tomorrow will probably help to answer that.
A sharp drop in the weekly crude oil inventories of 6.5 million barrels as reported by the US Department of Energy pushed the WTI prices higher initially. Nevertheless, an almost non event in the US with the Fed holding fire for now spurred a downturn in energy sector as well. So we saw a retracement late in the day but the WTI managed to keep some of the early gains closing $0.88 up at $88.91.