Well it looks like we’re dodging bullets in the financial markets today as just about every possible risk event came in with a positive result for risk appetite so that’s exactly what we are seeing today. Yesterday I mentioned the volatility of the markets and how yesterday’s down day was really nothing more than fear as there was little new information to change sentiment.
This has set today up for a risk-taking day, with stocks and commodities higher and the Dollar and Yen lower. There was a lot of news today that could have derailed the markets today and continued the slow slide lower, but so far the news has been good.
Let’s start with the interest rates decisions, first in the UK. The BOE this morning left both interest rates and the asset purchase plan unchanged as the market was expecting. While there is no accompanying statement today, there was just the slightest chance they could have been more accommodative as the UK economy is starting to flounder, and there was absolutely no chance of tightening so the market is seeing the no-change as a positive. Industrial production figures came in lower than expected. We will find out in about two weeks time at the release of the meeting minutes how unanimous that vote was.
In the EU, the ECB also left rates unchanged and received the same response as the BOE decision, though now the Euro is starting to sell-off a bit ahead of Draghi’s speech later this morning. While there was a greater chance of the ECB being more accommodative than the BOE, neither bank budged. It will be interesting to hear what Draghi has to say today as clearly the Euro debt crisis is weighing heavily on the European economy and most economist think that the EU is facing recession, if they aren’t in one already.
However, Draghi and Europe received some excellent news on the debt crisis though as both Spain and Italy both had successful bond auctions that saw their interest rates cut nearly in half, as demand for this debt was huge. Spain in fact got off nearly twice as much as they were expecting. These bond auctions are going to be risk events going forward so every time there is a new one, the markets will be on pins and needles trying to figure out what the yields will be and whether or not they are feasible for the issuing country to service.
But Draghi today will likely address the overall EU economy and how to get banks lending again rather than just setting up carry trades between the ECB and the LTRO. However, if yields can continue to move in the right direction than that makes the ECB chief’s job that much easier. The fact that CPI data came in mostly lower than expected will also provide some temporary relief, but the ECB is going to have to be vigilant against deflation.
Overnight, China set the stage for risk appetite as their CPI data came in slightly higher than expected at 4.1% but lower than last year’s 4.2%. At this level, China does not need to tighten monetary policy so in other words it is game on again. This benefited the Aussie dollar, and in fact it traded exactly as I thought it might and posted on Monday.
However, risk appetite is starting to abate as the US data is coming in this morning worse than expected. Advance retail sales figures have come in worse than expected showing a gain of .1% vs. the expectation of .3%, and the initial jobless claims also came in worse than expected showing 399K newly unemployed vs. the expectation of 375K and perilously close to the 400-handle the economy has been trying to shed.
So markets are pulling back from earlier highs though it will be interesting to see if this trend continues for the rest of the day. My feeling is that if the market is happy with European debt this morning, then it should be positive for the markets overall. While some of the US data may be showing weakness, overall the numbers have been positive though much of that may be because of the increased demand from the holiday season.
Draghi’s speech today should be supportive of the EU economy and recent stock earnings have been good so far. Gold has been rallying in the wake of a lower Euro though overall risk appetite has been mixed. So my hope today is that the markets can shake off this temporary weakness this morning and return to the early morning trend of risk appetite.
