Europe
European markets were caught unawares today by the European Central Bank unexpectedly cutting all their main interest rates by 0.1%, pushing the deposit rate to -0.2%, as well as announcing a new asset purchase program, as monetary policy in Europe continues to move into the realms of the highly experimental.
The FTSE 100 put in a new 14 year high for the second day in succession before slipping back once more, while the biggest risers were Spanish and Italian markets as investors snapped up Spanish and Italian bonds and equities as the search for yield intensified.
While these new measures will be dressed up as a form of quantitative easing they are nothing of the sort. They are an attempt to ease credit conditions in the euro area and drive yields lower across the board, by the purchase of packages of small business and real estate loans. Let’s not forget these new measures are in addition to the new TLTRO’s which are due to begin on the 18th September, which suggests that the ECB are becoming increasingly concerned about the lack of growth in the Euro area.
In a sign that policy meetings could well become more fractious in the coming months the decision was not unanimous, with Bundesbank President Jens Weidmann reported to be opposed to all the measures announced today. Mario Draghi had better hope this new plan works because if the ECB is forced to go further we could see these splits widen and become much more political.
It is especially noteworthy that while Italian and Spanish markets have risen strongly, the DAX and the FTSE 100 have so far unable to follow through on the bulk of their gains, which would seem to suggest that investors remain unconvinced as to how successful these new measures are likely to be.
In truth the ABS market in Europe remains fairly small, which is probably why President Draghi was rather evasive when asked about how big this new program might be.
The biggest movers today have been Edinburgh based insurer Standard Life (LONDON:SL) after the company announced that it was selling its Canadian operations to Manulife Financial (TO:MFC) for £2.2bn, while returning a significant amount of that cash to shareholders.
On the downside Hargreaves Lansdown Plc (LONDON:HRGV) has continued to slide after Liberum reiterated its “sell” recommendation due to downside risk to the company’s profit margins.
BP (LONDON:BP) shares have also tumbled after a US court ruling that the company was grossly negligent for its conduct with respect to the Deepwater Horizon oil spill.
One of yesterday’s biggest gainers Ashtead is also slipping back on the back of some profit taking after yesterday’s strong numbers.
US
US markets have opened higher again today for the third day in a row, but upside progress continues to remain hard won. The latest ADP employment report for August came in at 204k, slightly below expectations of 220k, while weekly jobless claims rose 302k, as attention turns to tomorrow’s employment report.
We also saw the latest ISM services data continue its improvement rising to 59.6 in August, its highest level in 9 years. While US stocks have taken comfort from today’s ECB rates move the fact remains that every improved data point brings forward the likelihood of a US interest rate rise.
In company news Costco announced that full year sales rose 7% to $110bn, above analyst expectations of a rise of 4.5%.
Apple (NASDAQ:AAPL) shares were also recovering after yesterday’s sharp declines as some investors get itchy feet ahead of next week’s big product launch. .
FX
The euro plunged after the European Central Bank surprised the markets with a 0.1% rate cut as well as the announcement of a new ABS program, which they said would start in October. Details of the size of any program were thin on the ground, but the announcement alone was enough to push the EUR/USD below $1.30 for the first time in over a year. The deposit rate was cut to -0.2%.
The Swiss franc has also lost ground, probably on the expectation that we will see a similar cut in rates from the SNB as they seek to defend the 1.20 peg against the euro.
Commodity dollars have been the best performers today, with the USDCAD pushing higher after posting a bigger than expected trade surplus for July.
The GBPUSD also slid back against the US dollar, below $1.6400, sliding to its lowest level since 11February, though it gained sharply against the euro after the Bank of England left rates on hold and the ECB cut its headline rates.
Commodities
Crude Oil prices for Brent Oil and US continue to move in opposite directions with Brent prices finding support on the back of today’s ECB measures which it is hoped will help with the growth prospects in Europe, which in turn should boost demand.
US oil prices have continued to remain weak despite improving economic data.
Gold and silver prices have managed to find some support today on the back to the easing measures announced today by the European Central Bank.
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