SCOREBOARD: ECB injection

Well the ECB‘s second 3-year LTRO was bigger than expected, banks taking a cool €529 billion, which was a bit above the cool €489 billion on the first 3-year LTRO. So Italian and Spanish bond yields fell further overnight, the Italian 2-year down 30 basis point to 2.14 per cent and the 10-year down 17 basis points to 5.188 per cent. In Spain the 2-year was off 13 basis points to 2.31 per cent and the 10-year fell 4 basis points to 4.989 per cent. So far so good and initially it was risk on – global equities were higher (the Dax up 1.1 per cent at the high), copper and gold had pushed modestly higher and US Treasuries sold off.

Then came Bernanke's testimony to Congress. Central banks giveth; and central banks taketh away. Well that's the fear and the market is a little bit concerned with the tone that chairman Bernanke took in his testimony. It didn't like it one bit. The problem is that he was a little more upbeat and so the concern is that QE3 may not be forthcoming, although personally I wouldn't worry.

Many analysts seem to think that it will still be forthcoming, regardless of what the economy actually does. In any case, Bernanke noted that the decline in the unemployment rate had been more rapid than might have been expected, although the labour market remained far from normal. He suggested that employment growth in recent months had been widespread across industries and that household spending had "advanced moderately in the second half of last year” although he added that the fundamentals remained weak (I would disagree with that). Risk off – the US dollar was bid and the index shot up 0.7 per cent.

Commodities were belted with gold down almost $80 to $1712, silver fell almost 7 per cent while copper is down 1 per cent. Crude was lower but has managed to bounce back as I write with Brent up 1.1 per cent ($122.9) and WTI up 0.5 per cent ($107.2).

In the equity space, the S&P dropped 14 points and was off 0.5 per cent at the low, it has recovered a bit from there but remains in the red as I write – down 0.1 per cent (1370). Basic materials, energy and healthcare seem to be leading the index lower at this stage, with consumer stocks and financials outperforming. The Dow, for its part, closed off 53 points to 12952, the Nasdaq was down 0.47 per cent (2966), while the SPI was 28 points lower to 4260.

And the debt market? Well, US Treasuries sold off and at the high, the 10-year was back up to 2 per cent. Bernanke's testimony saw that come off somewhat, back down to 1.95 per cent, but as I write the yield is at 1.981 per cent or a bit over 4 basis points higher from 1630 AEDT. The 5-year yield sits at 0.876 per cent from 0.8382 per cent, while the 2-year is at 0.297 per cent from 0.289 per cent. Aussie futures were off five to six ticks and aren't too far off their lows at 96.34 (3s) and 95.92 (10s).

Finally, in the foreign exchange space, we saw the Australian dollar push higher until Bernanke's speech, where it went offered. From a high of 1.0856, the unit dropped a big figure to sit at 1.0754 as I write. Euro, too, was weaker and fell over a big figure to 1.3338, while sterling is little changed (1.5929). JPY is higher and sits at 81.20 from 80.29.

In other news and data, the Fed's Beige Book added to Bernanke's more positive tone, noting that "overall economic activity continued to increase at a modest to moderate pace in January and early February”, which isn't a big change from the last survey, although reading through the report it is more upbeat than last time. Then fourth quarter US GDP was revised up a bit to 3 per cent from 2.8 per cent on the back of stronger consumption and investment numbers. Still in the US, the Chicago PMI rose to 64 in February from 60.2 in January.

Turning to the day ahead we see fourth quarter CAPEX numbers for Australia at 1130 AEDT. The consensus is that capex rose 3.8 per cent although I suspect there is downside to that following the big drop in construction work done that we saw yesterday. Also out at 1130 AEDT are building approvals for January, while RP Data-Rismark's house price series comes out at 1030 AEDT. Looking abroad we get the Chinese manufacturing PMI at 1200 AEDT, while tonight it's worth watching out for eurozone CPI (February), US personal income and spending and the ISM index for February (market looks for a small rise to 54.5).

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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