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Sunrise Market Commentary

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The Polish central bank cut interest rates by 25 basis points to 3.50%

Thu, Jun 25 2009, 06:54 GMT
by KBC Market Research Desk

KBC Bank

• Yesterday, US equities started the session in positive mood due to an unexpected increase in US durable orders, but reacted somewhat disappointed to the Fed’s decision to keep the amount of asset purchases unchanged. S&P ended 0.65% up, while Dow lost 0.28%. This morning, most Asian shares show decent gains.

• US durable goods orders rose for the second consecutive month by 1.8% M/M, while a decline was expected. Although part of the improvement was aircraft related, the figures provide more evidence that the economy is at a turning point.

• Yesterday, the ECB pumped €442.2 billion in one-year loans into the euro zone’s banking system, making record amounts available in a bid to unlock credit markets and revive the region’s economies.

• The Polish central bank cut interest rates by 25 basis points to 3.50%, the sixth cut in eight months, as the economic outlook for Central and Eastern Europe was further revised downwards.

• On Wednesday, the Swiss franc fell sharply after the central bank intervened to halt the Swiss currency’s rise. The Bank of International Settlements was active in the market on behalf of the Swiss National Bank, first buying euros and later buying dollars against the Swiss currency, according to traders.

• The Organization for Economic Cooperation and Development revised upward its assessment of the world economy for the first time since 2007 and added that activity looks to be approaching its nadir, but recovery is likely to be both weak and fragile.

Markets

Yesterday evening, the Fed decided to leave the key items in their policy statement unchanged. As such, the FOMC reaffirmed that rates could remain at exceptionally low levels for an extended period and also made no changes to its quantitative easing policies. The FOMC acknowledged that the pace of economic contraction is slowing and prices of energy and other commodities have risen, but the FOMC still expects substantial resource slack to keep inflation subdued for some time. Although the statement was broadly in line with market expectations, US Treasuries and equities fell off their intra-day highs, while the dollar gained ground on the decision, as some investors had anticipated an increase in the amount of US Treasury purchases.

Earlier during the session, US Treasuries had moved broadly sideways awaiting the 5-year Note auction and the Fed decision, as the eco data, durable orders and new home sales, had been mixed. US Treasuries however rallied higher after the 5-year Note auction attracted again strong demand and pushed prices higher. The move however petered out soon, once the Fed statement was released. At the end of the day, US yields were around 5-7 basis points higher across the yield curve. Today, the US Treasury will hold a $27B 7-year Note auction.

In the euro zone, the massive boost in liquidity provided via the record amount allotted in the first 1-year refinancing operation resulted in a bull steepening of the German yield curve. In its first 12-month Repo, the ECB allotted €442.241B at a fixed rate of 1% to 1121 banks, way above the previous high of €348B injected back in December 2007 and above the market consensus of €300B. The boost in liquidity is likely to drive money market rates still lower, with the EONIA expected to fall close to the deposit rate of 0.25%. The question now will be whether banks will deposit the excess liquidity at the ECB deposit facility or whether they will step up lending. In a first response, there was a bull steepening of the yield curve, with German 2-year yields falling by 7.5 basis points compared to a rise of 0.6 basis points in 30-year yields. Comments of the OECD that the ECB should start ‘exhausting the remaining scope’ and cut interest rates below 1% added to the positive sentiment at the short end of the curve, even though recent comments of ECB policy makers have indicated that current rates are ‘appropriate’ and that no change should be expected anytime soon.

On the currency markets, the dollar gained against most currencies, as the Fed didn’t step up its quantitative easing policy. In the UK, the testimony of the MPC on the inflation report delivered no new info on a potential further increase in the asset purchase facility and sterling strengthened again towards the recent lows against the euro. Yesterday, the SNB intervened to weaken the Swiss Franc, as it appeared to have bought both euros and dollars against the Swiss currency. The trigger for the SNB’s action once again appeared to be the prospect of the Swiss franc breaching the 1.50 level against the euro, which is now regarded as the central bank’s “line in the sand” as far as the Swiss currency’s strength is concerned.

Today, the calendar contains the euro zone industrial new orders, US weekly claims and final figure of first quarter GDP. Euro zone industrial new orders are forecasted to come out flat in April after eight consecutive declines. But the data are rather outdated (April) and therefore no market impact is expected. In the US, initial claims are expected to extend their stabilization path (from 608 000 to 600 000). It will also be interesting to keep an eye on the continuing claims to see whether they can extend last week’s improvement after 20 consecutive increases. The final figure of US fourth quarter GDP is expected to show no major changes compared to the previous release.

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Published on  Thu, Jun 25 2009, 07:26 GMT