ECB Leaves Policy Unchanged, US Stocks Close With Large Gains
Danske Markets | Jun 07, 2012 03:58AM ET
- ECB left policy unchanged, but our economists still look for a summer response
- Positive sentiment remains intact – US stocks closed with large gains
- EUR/USD is back above 1.2550 – Brent oil is back above USD100/bbl
- Australian macro continues to surprise positively
- Focus remains on monetary policy as the BoE meets and Fed‟s Bernanke speaks
The ECB did not deliver the rate cut that our economists had expected and generally sounded less dovish than expected – leaving staff projections for 2012 growth unchanged. This helped lift yields, also in the short end of the curve.
Sentiment started to improve, however, as ECB president Draghi stated that the decision to leave rates unchanged was not unanimous, but that some members were calling for a rate cut. We still see a high probability that majority will shift towards further easing and believe it is too early to rule out a July rate cut – even as there was no "language signalling" of a pre-commitment. Sentiment was further supported by international media reporting that the EU is working on ways to allow the European Stability Mechanism (ESM) to lend directly to banks, while the banks' home state would retain liability for the aid.
US stock markets closed with large gains – the S&P500 index up 2.3% – and the Dow Jones is now back in positive territory for the year. It thus appears that investors are positioning for a market positive response by Fed's Bernanke today as he testifies before Congress (i.e. expectations have risen for a promise of further stimuli). US Treasurys sold off yesterday, but have regained some of the losses overnight. Meanwhile, Spanish government bond spreads tightened further ahead of today's auctions. After all the headlines yesterday, one could say: so much for Spain being shot out of the market.
EUR/USD rebounded alongside risk assets and is now back trading above 1.2550. From a technical perspective, this means that the strong downtrend has been broken and it is worth keeping in mind that non-commercial investors according to the IMM data were near record short going into the week.
One currency that has clearly broken out of its recent downtrend is AUD, which gained further overnight on yet another positive data surprise. Employment rose by 39,000 in May and markets clearly need to discount less risk of a severe slowdown in Australia. Economic surprises in Australia have previously led economic surprises in the global economy. For AUD, our take is that AUD/USD could easily see further upside, as noncommercial investors had turned as short AUD by last week as in October 2008.
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The key event will be a testimony by Fed chairman Ben Bernanke before the Joint Economic Committee of the US Congress. Bernanke will talk on the economic outlook and his signals on further stimulus and – if any – what kind of stimulus will be studied closely. We believe the Fed now has the ammunition for further policy stimulus already at the 20 June meeting but it is likely to be a close call. Thus, Bernanke's speech will give important clues on this. Bernanke normally puts a lot of weight on labour market developments and whether the pace of growth is strong enough for the unemployment rate to decline at a decent pace. Growth has been below 2% in the last four out of five quarters including in Q1 when it was 1.9%. With the past three labour market reports disappointing, we believe Bernanke will be in the camp for more stimulus – and that he will be able to persuade the rest of FOMC which is currently dominated by doves.
Apart from Bernanke's speech, US initial jobless claims, UK service PMI and a BoE monetary policy meeting are scheduled for today. We expect the BoE to keep the base rate unchanged at 0.5% and the asset purchase target at GBP 325bn. However, we believe the MPC is considering all kinds of options to stimulate the economy which fell into technical recession last quarter. With only a few forecasters expecting a move, the market reaction is set to be limited.
Fixed income markets: The ECB meeting was a slight disappointment, but not far from most watchers‟ expectations. Still, market sentiment improved during the press conference. This is not the market reaction we would expect given what Mr Draghi communicated. However, as he spoke, international media reported that the EU is working on ways to allow the European Stability Mechanism (ESM) to lend directly to banks, while the banks' home state would retain liability for the aid. Bear in mind that such a move would involve ESM treaty changes, which take time (remember that the ESM is not even fully ratified yet). While the risk sentiment might have a bit further to go on this story, we advise a cautious stance. In our view, the real game changer will rather be when the major central banks start easing monetary policies. Today we will look for Spanish auctions in the 2y, 5y and 10y segments. Further, we will keep a close eye on Bernanke's testimony before US lawmakers on the economic outlook, although we doubt we will hear more or less about QE3 than we have to date.
FX markets: Despite no further stimuli from the ECB, markets have continued to rally, as the lack of negative surprises and the increased hopes of EU aid to European banks have left the "excessive" bearish market positioning vulnerable. As discussed on the front page, excessive positioning is exactly what has allowed for the strong rebound in AUD. As long as the Fed's Bernanke does not disappoint markets too much today, we could see further short covering this week in not least the high-beta currencies, but perhaps even the euro. The downtrend in EUR/USD has been broken for now, but while investors are likely to remain very short EUR, this is not the first positive beta currency that we would pick up. Consider instead the commodity currencies such as AUD, NZD and CAD, while keeping stops tight as growth visibility remains low and European debt risks high.
Industrial production, which disappointed in March and fell to its lowest level in a year, is expected to have corrected somewhat in April with growth of 0.5% m/m. However, the weaker outlook for exports (due to the escalating crisis in the euro area)should limit the growth opportunities for export-dependent industries.
Norway: Industrial production has been weaker than indicated by the PMI so far this year but the quarterly GDP figures suggested somewhat stronger growth in industry. Therefore, we do not expect to see any major slowdown in April and predict growth of 0.3% m/m in today's number.
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