Europe
The bond rout that kicked-off again yesterday, went into overdrive on Wednesday as the German 10 year benchmark bund fell to lows not seen since October last year. Equities across Europe managed to shrug off the sharp rise in the euro and bond yields, buoyed on by stronger service sector data that hints at strengthening economic recovery.
The ECB left all policy rates on hold at its latest meeting in June while lifting its inflation forecast for 2015 but dropping its 2017 growth forecast slightly. The 2017 growth forecast was cut from 2.1% to 2% and the inflation outlook for 2015 was raised from 0% to 0.3%, all other forecasts were left unchanged.
ECB president Mario Draghi indicated no early end or acceleration of the ECB’s quantitative easing program, saying that exiting is a “high class problem” which has not yet been discussed.
Mr Draghi held the party line on Greece stating that the ECB wishes Greece to remain in the Eurozone but wants a strong agreement with its creditors.
The ECB president addressed the recent bond sell-off with a number of possible explanations including higher Eurozone growth and inflation as well as technical factors such as debt issuance.
Notably, Draghi said that when there are low levels of interest rates, asset prices tend to show more volatility and that that is something markets need to get used to. He confirmed the committee was unanimous that it should look through market volatility and maintain stable monetary policy.
The higher inflation forecast coupled with Mr Draghi’s remark that markets should prepare for higher volatility seemed to be enough send bund yields and the euro sharply higher. Especially in the light of weaker economic data from the United States which helped widen the yield differential between Germany and the US.
In the UK, gains were limited by an unexpected slowdown in the rate of expansion of Britain’s service industry while resource stocks were a drag as commodity prices fell.
Kantar data looks like it may have saved top four supermarket WM Morrison Supermarkets PLC (LONDON:MRW) from exiting the FTSE 100 on evidence that sales rose in the last twelve weeks. Morrisons was the only top four supermarket to increase sales but Tesco (LONDON:TSCO) and Sainsbury’s shares were up in sympathy.
Shares in Dixons Carphone (LONDON:DC) dipped after a strong run into quarterly results that saw an increase in sales, helping the company raise its full-year earnings outlook.
US
A supportive stance from the European Central Bank and better than expected private sector job growth helped US markets to a positive open on Wednesday.
The ADP report showed employers added 201K jobs in May just above expectations of 200K but a significant jump on the downwardly-revised 165K created in April.
Service sector data was a little more disappointing, diverging from the stronger than expected manufacturing data seen earlier in the week. The ISM survey dropped to 55.7 from 57.0 expected and 57.8 previously.
FX
A resumption of yesterday’s rally in the euro and a pause in the yen left the US dollar index lower on Wednesday.
The British pound took a knock from the weaker UK services PMI data but bounced off the lows thanks to dollar weakness.
The dollar-yen remained below the key 125 figure on Wednesday.
Commodities
Oil temporally gained after US crude oil inventories dropped for another week but quickly came off its highs since it was a smaller decline than expected. The -1.9M weekly decline in crude oil stocks is hardly indicative of a collapse in US oil production. With the OPEC meeting around the corner expected to show no cut in production, oil markets were quick to take profits.
Gold and silver lost ground, adding to the weakness seen earlier in the week, despite the US dollar losing value against a basket of currencies.
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