ECB Sets the Stage
- Traders Respond to Trichet's Comments
- News and Notes From Around the Globe
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Traders Respond to Trichet's Comments
Risk sentiment was generally well bid again overnight, following yesterday's rather robust performance during the North American trading session. Equities were snatched up throughout Asia with the Nikkei, Hang Seng and Shanghai Composite up 1.81%, 0.86% and 0.71% respectively. Europe's major bourses are trading in the green as well this morning as we head into both the European market close as well as the European Central Bank's post-policy announcement press conference. The ECB surprised no-one by maintaining its targeted interest rate while little changed within the Bank's accompanying press release as well, though market participants have been keenly interested in the less formal comments offered by ECB President Jean-Claude Trichet as I write. On balance, it seems as though it is business as usual at the ECB with no clear change in policy or directive, meaning that some market participants will be left disappointed that the Bank failed to provide a targeted figure with respect to its ongoing bond purchases or a firm timeline for which the program will be extended. Rather, Trichet has seemingly been content to stick with the mantra that the ECB's current temporary bond purchase program will remain just that; a temporary initiative designed to provide liquidity and support to markets that in its view, are not fully functional at this time, and will not be expanded to become a full-blown quantitative easing program.
While it is understandable that many traders who are typically long risk in the present environment would like the Bank to underwrite their positions by increasing the supply of cheap liquidity sloshing around in markets, it would be immensely difficult from a political standpoint for the bank to complete a total about face with respect to quantitative easing. In short, after being openly critical of the Fed's attempts to reflate the world economy by buying Treasuries through its own quantitative easing initiative, the ECB can hardly do the same with a half-hearted explanation of how its situation is different. Nonetheless, there seems to have been some expectation on the part of a segment of market participants that the ECB would do more in this regard this morning and those traders are now likely to dial back some of the risk accepting trades that they've placed in the market in the preceding days. As such, the EUR has backed off approximately 130 basis points from the overnight high in response to the Trichet's comments, a retracement that has come despite the rather successful conclusion of a Spanish bond auction this morning and the release of GDP and PPI data that was bang-on expectations.
The interesting story to watch throughout the day will be just how much of an impact the somewhat disappointing response from the ECB will have on overall market risk sentiment. The common currency has fallen off, but North American equity futures are still pointing to a positive opening while the response in currency markets in general has been somewhat more muted. That said, should the EUR continue to unwind the gains that it has accrued in the previous few sessions, it would be difficult to imagine a scenario where the broader market wouldn't follow far behind.
News and Notes From Around the Globe
The Swiss franc has experienced somewhat of a volatile ride this morning with the release of two significant data series that show the economy headed in different directions. On the positive side of the ledger, Swiss Q3 GDP came out slightly ahead of expectations with a 0.7% advance against the market's expected 0.5% gain though the result was still somewhat of a downgrade for the overall economy when compared against the previous quarter's 0.8% result. The positive news however was largely offset by a much more modest than expected increase in retail sales, which came in at 3.5% versus the market's consensus estimate of 4.9%. It should be noted that both figures are backward looking in nature and while the market will generally be more responsive to the retail sales figure that disappointed, the fact that consumers have actually been opening their wallets more frequently of late (as indicated by the overall increase in sales) can't really be considered a negative despite the market's rather optimistic expectations. As might be expected, the Swissy is a touch softer this morning but is still trading a touch above parity with the US dollar.
US initial jobless claims have come in slightly worse than expected this morning as traders begin to position themselves for tomorrow's all-important non-farm payrolls report while the market is still expecting to see the release of US pending home sales later this morning. The Canadian data calendar is quiet today, though the currency is continuing to firm even after the ECB's press conference due to sustained strength in commodity prices. USDCAD has been grinding lower throughout the European session and early part of trading in North America and is now being dealt with a 1.00 handle as market participants again begin to speak of parity and a fourth challenge of the 0.9980 triple bottom with more than passing interest. That said, with little in the way of fresh incentives likely to be offered ahead of tomorrow's jobs reports, USDCAD is very likely to trade in an all too familiar pattern for the remainder of the day.
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