Equity & Commodity Markets Expectation Rises on ECB Meet.
Equity & Commodity Markets fell as expected, on FOMC news of no new monetary stimulus, while the U.S. dollar rose. Investors are looking for the ECB-European Central Bank President to make good on his promise to do whatever is needed to protect the euro, interpreted by most as a signal that the ECB will intervene in bond markets. Should Draghi fail to overcome the objections of Germany’s Bundesbank to such action, the disappointment could spark a massive sell off in the Equity & Commodity Markets.
The US Federal Reserve disappointed market expectations among some investors by taking no new measures, sending U.S. stocks lower and the dollar higher against the euro and the yen. The FOMC offered no new monetary stimulus on Wednesday even as it signaled more strongly that further bond buying could be in store to help a economic recovery that it said had lost momentum this year. The Fed maintained its earlier stand but nevertheless showed it was prepared to do more to support an ailing economy. “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed,” the Fed said in its statement.
A report on Wednesday showed U.S. companies added 163,000 jobs in July, more than expected. However, that survey, the ADP National Employment Report, does not carry as much weight as the government’s more comprehensive labor market report due on Friday, which includes both public and private sector employment. Manufacturing data from the Institute for Supply Management pointed to a second month of contraction in the factory sector. Europe’s crisis is blamed for part of the U.S. slowdown, as fears of another financial crisis keep businesses and consumers on the defensive. The FOMC’s high-profile gathering in Jackson Hole,Wyoming, in late August may send a strong message to the markets. The Fed’s next policy-setting meeting is scheduled for September 12-13.
Other tools Bernanke has signaled are under consideration include lowering the interest the Fed pays banks to park their reserves at the central bank, currently at 0.25%, which could induce them to boost lending. Another option would be to pursue a ‘funding for lending’ program like the one recently implemented by the Bank of England, whereby the Fed might provide cheap short-term loans to banks in exchange for guarantees that banks will resume lending to individuals and firms.
The Federal Reserve will want to see what the ECB does to handle its sovereign debt crisis, especially after last week’s comments by ECB President Mario Draghi to do whatever it takes to save the Euro. The Federal Reserve may then take necessary action in a large way if necessary in a high-profile gathering in Jackson Hole, Wyoming, in late August or in the next policy-setting meeting is scheduled for September 12-13.
A Big Positive Bang expected from the ECB today: No Options now except Concrete Intervention.
ECB President Mario Draghi last week ratcheted up speculation of further ECB purchases of Italian and Spanish bonds by saying he would do “whatever it takes” to save the euro. Equity & Commodity Markets, especially the Gold Trading Markets await the outcome of the ECB policy meet today with abated breath. Equity & Commodity Markets expectation is for a hugely positive response & may test the central bank willingness to do whatever it takes, either before ESM (European Stability Mechanism) is approved in September or before it becomes funded and operational. Risk markets are going to be very focused on the outcome of the ECB meeting. The Fed did what was expected and that was make a statement which had a clear bias toward further easing of monetary policy should it be required. Markets are clamoring for ECB action to quell Europe’s sovereign debt crisis, which is threatening to cripple Spain and Italy and tear the 17-nation euro area apart.
Markets face the risk of a huge selling off after the results are released if the ECB President attempts to Only keep the Verbal intervention & assurances active (which works only for a while as seen last week) & No Actual and Immediate Action. If Draghi just comes out with a do-nothing-now, markets are going to react extremely badly and the ECB will have a full- blown crisis on their hands. Draghi proposes that Europe’s rescue fund buy government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its interest rates, the officials said on condition of anonymity. Further ECB rate cuts and long-term loans to banks are also up for discussion as the Euro economy slides toward recession, Bloomberg reports.
The BoE-Bank of England is expected today to hold its key rate at 0.5% and maintain its bond-purchase target at 375 billion pounds.
Commodity Markets Update:
Gold trading at Commodity Markets saw Gold futures prices tumble after the Federal Reserve left interest rates unchanged and maintained that it sees interest rates low through late-2014. Crude Oil Futures in the Commodity Markets fluctuated after climbing for the first time in three days yesterday as government data showed crude inventories slid the most since December. Read more…
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