More delay from the ECB

April 3, 2009 — Mitul Kotecha

Once again the European Central Bank (ECB) left markets hanging following its decision to cut interest rates by less than the market expected. Unlike the Bank of England which has been quick and aggressive in cutting interest rates and adopting unconventional policy the ECB has lagged behind due in large part to the difficulty in forging a consensus with so many council members involved in the decision making progress.

The ECB put off a decision to introduce new unconventional monetary policy tools until the May meeting due to the opposing views of various council members which in the end resulted in an unstable compromise. Although ECB President Trichet kept the door open to further easing the room is now limited, with another cut to 1% possible at the May meeting.

This will be less important and less influential on the economy compared to potential new measures that could include purchasing more commercial paper and corporate debt, widening the pool of collateral accepted in market operations and increasing the maturity of loans to banks. Buying government debt still seems unlikely given the technical problems in doing so.

The euro rallied against the US dollar following the ECB’s decision due to the fact that European interest rates remain relatively high compared to the US but a stronger euro will not come as good news for Eurozone exporters who are struggling in the face of a collapse in global demand.

The ECB may have put off the decision to another day but it will not be able to escape forever. The May meeting will be crucial to determine just how quickly Europe’s economy will recover. At the moment the lack of strong action suggests a delay in recovery compared to the US.

Posted in central banks, Currencies, Economics, Europe, UK. Tags: , , . Leave a Comment »

Tough week ahead

March 30, 2009 — Mitul Kotecha

It looked as though it all went wrong today as the bad news just kept on coming. Following reports on Friday that JP Morgan and BoA had a more difficult month in March following a stronger start to the year, reports that UBS would be shedding thousands of staff and would announce billions more in writedowns as well as news of the takeover of a Spanish regional bank by the Bank of Spain hit market sentiment hard. Topping all of this were comments by the US administration that some banks would need more capital in addition to that already provided. The administration also said that bankruptcy may be the best option GM and Chrysler.

This sets up a difficult week ahead, with risk aversion set to rise further and the news unlikely to get any better. Economic news is likely to add to the market’s gloom as US releases such as the ISM manufacturing survey for March and the jobs report will likely reveal further deterioration. Expectations for another hefty drop in payrolls in March could see a total of over 5 million jobs lost so far in the current cycle with many more to go.

The news in Europe will not be much better and as today’s Eurozone sentiment indicators have shown the outlook for the economy remains gloomy. The ECB is likely to cut interest rates but will refrain from embarking on the quantitative easing policies followed by other central banks such as the Fed or BoE. As risk aversion rises the USD is set to continue to strengthen against most currencies this week.

Posted in bank rescue, central banks, Currencies, Economics, equity markets, Europe, Financial crisis, UK, US, US administration. Tags: , , . 6 Comments »

Fed throwing everything but the kitchen sink at the crisis

March 20, 2009 — Mitul Kotecha

The aftermath of the Fed’s surprise decision to buy US Treasuries was dramatic across markets, with Treasury yields dropping, equities rallying and the dollar sliding. The Fed has now moved from what was initially credit easing to full blown quantitative easing. Effectively the Fed is throwing everything but the kitchen sink at the problem and is arguably the most aggressive central bank at present.

What are the implications:

1) Equities like the news and it helped extend a rally that had been in effect for a couple of weeks. But the momentum is likely to run out quickly as the bad news starts to filter back into the market once again.

2) Commodity prices rallied, especially gold. Why? Inflation concerns intensified following the Fed move due to the risk that the Fed will not be able to end it’s programme of “printing money” quickly once the economy starts to turn around. Commodities are set to rally further.

3) The dollar dropped like a stone, and although it is difficult to see it regaining much ground in the wake of a central bank that flushing the market with dollars, its falls looks overdone. For now, the dollar looks like it has entered new weaker currencies and may even benefit if the market appetite for risk declines again.

4) Other central banks in particular the European central bank will be under huge pressure to follow the Fed. The Bank of England, Bank of Japan and Swiss National Bank have already moved but not as aggressively as the Fed. So far the ECB has been reluctant to act and technical issues mean that it can’t act in the same way as the Fed. Nonetheless, the rise in the euro means that something may need to be done and quickly.

5) The move by the Fed shows that policy makers are doing all they can to turn things around, but this is merely a reflection of the severity of the crisis. Economic recovery is still some months away

Posted in Bond markets, central banks, Commodities, Currencies, Economics, equity markets. Tags: , , . Leave a Comment »
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