Wednesday, November 16, 2011

It's All About the ECB

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Quite a round trip in the futures market.  I went to bed with futures screaming downward to the tune of -11 on the S&P 500 as worries continued about European sovereign debt.... woke up very early (4:30 AM EST) to a happy happy place on futures as apparently the ECB came in with guns blazing buying Italian and Spanish debt on the secondary market.  Futures were actually green on the Dow - and European markets were positive.  Then within 2 hours (6:30 AM) the S&P 500 was back down 11, and European markets red.  Allrighty then.

Really, it remains all about the ECB.
  • Pressure eased on Europe's government debt market on Wednesday, with Italian borrowing costs back below the 7 percent level viewed as unsustainable after the European Central Bank was seen buying up bonds.
  • Italian 10-year bond yields were at 6.85 percent, having peaked well above 7 percent on Tuesday, the level generally viewed as requiring an outside bailout.
  • Traders said the ECB was behind the move.  "They're heavily in on Italy and Spain, 2-10 years," one bond trader said.
  • The European bond market is becoming very binary, and ECB-dependent,” said Mohit Kumar, head of European interest- rate strategy at Deutsche Bank AG in London. “Whenever the ECB steps in, the market likes it, when it steps back, you see pressure. There are no real buyers.”

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In other news, employment data out of the U.K. continue to point to a dour situation.
  • U.K. Q3 unemployment 8.3%, +0.4 percentage point on the quarter and increasing to the highest since 1996. Number of jobless +129,000 to 2.62M, the highest since 1994.
  • In the three months through September, unemployment among 16-24-year-olds increased by 67,000 to 1.02 million, the highest since comparable records began in 1992. The jobless rate in that category was a record 21.9 percent.
The Bank of Japan and Bank of England both slashed growth forecasts overnight, and the BOE is open to more QE
  • In its quarterly Inflation Report, the BoE indicated it may have to add to its 275 billion pound asset purchase program, as it predicted inflation would fall to 1.3 percent in two years time. It expects inflation to fall below its 2 percent target by the end of 2012.
  • Inflation eased to 5 percent in October and King said in an explanatory letter to the government on Tuesday that he expected it to fall sharply in the next six months and return to around target by the end of 2012 as one-off effects from this year's VAT rise fall out of the data.

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