London View - Afternoon

Risk-averse tone - Markets under pressure

Risk-averse tone ensues this afternoon in Europe with stock markets under pressure as core government bond prices rise and yields fall as the focus remains largely on the Bank of England and the European Central Bank.

 

The BOE presented its quarterly inflation report earlier, with the Bank striking a dovish note in order to downplay the strength of the sterling and push back expectations of a rate hike in 2014 – it seems to have worked, with sterling and UK gilt yields moving lower following the report. The UK also published unemployment data which again was encouraging, with the rate dropping to 6.7% from 6.9% previously, indicating momentum in the labour market.

 

The BOE doesn’t quite think so, however, suggesting that there’s still a slack in the labour market with real wages not matching inflation just yet which to some degree is correct following the data. The big take-away from the BOE’s report this time around was that rates will rise within a year, but only a small increase; growth forecasts need little changing and the Bank keeps an open mind about policies but is reluctant to get involved to cool the housing market just yet. All in all, the BOE dashed any expectations of a rate hike this year – a widely prudent approach with many seeing it as the BOE buying some time before they have to get to work.

 

The ECB was under focus again today with the euro currency pressured by recent speculation that the ECB is looking to inject stimulus measures next month, endorsed by the German Bundesbank who previously have vocally opposed stimulus action by the ECB if unconventional. Now, all options are considered from negative deposit rates to a bond-buying programme – the market is welcoming this; it’s what market participants want and is taking the wind out of the recent strength in the euro which saw it last week hit the psychologically important $1.40 mark against the US dollar.

 

European equities are currently hovering just below multiyear highs and US stock markets are weaker at the open – it seems to be a bit of a pause in the markets’ recent rally but does not mean we have lost the bullish momentum just yet. With the accommodative ECB chatter and dovish BOE we also have dovish rhetoric from the Federal Reserve who have pledged to low-rates even after QE ends this year.