With the US celebrating their supposed independence (freed from Britain, enslaved by Wall Street) and nothing really coming out of Europe, it was a very quiet night on ye olde markets and trading was very thin. That may improve tonight if the ECB pulls out some magic and either cuts rates or conducts another LTRO. Here’s hoping they don’t but I think the consensus is that they’ll cut 25bps.
The problem of course is that inflation is still very much a problem in most of the developed world and in Europe, it has been above target more often than not. The BoE has abandoned its inflation target quite clearly but the ECB, under the guidance of the Bundesbank – the last remaining sensible central bank – may not be so quick. It's interesting to note that the IMF reckons they should leave rates steady and just buy bonds. But otherwise punters may choose to wait until we see US payrolls on Friday.
In any case and for last night, the major European indices closed a little lower at the bell but magnitudes were small (with the Dax, CaC and FTSE off 0.1-0.2 per cent). The news flow was light and euro centric obviously – but not unimportant. News reports suggest that following the EU summit, European banks, and especially banks at the periphery have found it much easier to borrow money. Indeed European banks have apparently issued more unsecured debt in the past few days than they did through all of the second quarter – with one Italian bank issuing €1 billion in debt. Then we saw an announcement from the French that they are set to raise corporate taxes and put on a wealth tax in the hope of raising €7.2 billion this year. These steps are to precede measures which are to be taken next year that will see a 75 per cent tax rate for those earning more than €1 million per year.
Despite these more positive steps, Italian and Spanish bond yields remain irrationally high. The Italian 10-year, for instance, rose almost 10bps to 5.73 per cent, while Spain’s equivalent was roughly 15bps higher to 6.32 per cent. This perverse market pricing is obviously puzzling European policymakers, again prompting a statement from the Italian prime minster that Italy won’t be needing a bailout. Maybe a regulatory probe to find out who exactly is manipulating this market is needed here as well.
Bonds otherwise rallied, and the German 10-year bund yield was down 7bps to 1.46 per cent, while Gilts were almost 6bps lower in yield (1.71 per cent). As for the euro, it fell about 70 pips to sit at 1.2522 as I write. The Australian dollar is otherwise 20 pips lower to 1.0275, pound sterling is at 1.5595 and the yen sits at 79.85.
There isn’t really much else going on. For Aussie markets, the SPI was little changed, as were debt futures, with the 3s and the 10s up about 3 ticks a piece to 97.49 and 96.925 respectively.
Looking at the calendar today, we see Australian trade data at 1130 AEST, for May, and a modest deficit of about $500 million is expected. Beyond that we see German factory orders for May, and UK house prices. Then of course in central bank land, both the ECB and BOE meet and we could see action from either or both. The BoE may print another £50 billion and the ECB is expected to cut 25bps to 0.75 per cent – cause, you know, that extra 25bp will make all the difference in the world. For the US, data includes initial jobless claims and the non-manufacturing ISM (for June). It's also worth watching out for chain store sales.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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