Politicians and central bankers seem to be singing to the same tune as comments out from Germany over the week end had a very similar tone to those from the ECB President Draghi earlier in the week.
The markets are now expecting something from central banks this week, in particular from the Federal Reserve and ECB. Investors might be disappointed if nothing comes out of the FOMC meeting this week and we could see a pull back in risk appetite as a result, however there’ll be even greater disappointment if nothing materialises from September’s meeting. But this time it’s not so much about the Fed but rather the ECB as the market is hoping that Draghi will back his words with action. Whilst the Fed has almost used up the bulk of its ammunition the ECB on the other hand is still yet to really flex its muscle and so we wait with bated breath to see what they’ll come up with.
For the euro bears all this rhetoric is nothing more than that and rightly so as the ECB has a specific mandate beyond which it can’t do much more that stabilising prices and monetary policy. Draghi’s predecessor was a serious stickler for the rules, so much so that he actually started raising interest rates during the height of the crisis and would never have dreamt of taking the ECB down the path that it’s gone until all the relevant treaties were in place. So Draghi will have to continue to “bend” the rules to his advantage and simply say that whatever he does is within the realms of stabilising monetary policy and therefore its mandate.
So what form will the next round of QE from the ECB take? Will we see any bazookas? When you consider Darghi’s comments you would have thought that he was gearing up for something more substantial than the recent SMP and LTROs which have well and truly worn off. To really bring Spanish and Italian borrowing costs down something a little more effective or substantial is required. Whatever happens it is likely to ruffle feathers in Germany even more and make central bankers there very uncomfortable as they see the ECB, of which they are the biggest shareholder, expand it balance sheet further and further.
US markets held up well on Friday despite the US GDP data which showed a drop in growth to 1.5% and a slump in consumer confidence. The Dow Jones climbed above 13,000 mark for the first time since early May which has filtered through to the start of this week for European indices as they commence on the front foot with the FTSE up some 20 points at 5650. Economic data comes in the form of some European numbers on consumer and business confidence.
The supporting comments by German Chancellor Angela Merkel and French President Francois Hollande lifted the euro on Friday to an intraday high of $1.2390. The shared currency was under pressure lately but last week’s interventions from EU officials had the desired effect for once. Despite a retracement in the afternoon session the euro closed 43 pips higher at 1.2321 and this morning is seeing a bit of profit taking as it dips back below the 1.2300 mark to 1.2285.
Optimism that the Europeans will get their act together pushed equities and the euro further up Friday. Gold followed suit as investors discarded the safety of the dollar and embraced risk again. So the precious metal added $9.4 to close at $1622.7, last seen in mid June and this morning is at 1620.
The WTI crude prices rose for the fourth straight session in the face of a slower expansion in the US economy accompanied by plunging consumer confidence and as seen previously a struggling employment sector. But the 70 cents rise to $90.13 was supported by expectations the Europeans will preserve their currency at all costs thus propping up demand in the energy sector.