Central Banks co-ordinate Monetary Offensive

• BoE delivers as expected

• ECB cuts rates and incentivises domestic lending

• PBOC rate cut confirms hard landing for China

• Troika meeting with Greece gets underway

There was no room for 4th of July hangovers as it was business as usual in the financial markets yesterday. With the Central Banks set to steal centre stage, they didn’t disappoint. As expected the BoE unanimously decided to increase asset purchases by a further £50bn to £375bn. The funds will be used to buy UK government bonds from the banks.

The main concern is that the extra liquidity does in fact find its way to the small business owners and private households and not get tied up in the banks’ balance sheets. Growth is being prioritised as the main concern over further inflationary pressures as concerns mount over a 3rd successive quarter of negative GDP in the UK. Interest rates remained unchanged at 0.5% as the marginal juice from lowering rates further wasn’t worth the squeeze.

Mario Draghi and the ECB cut rates by a further .25%, the lowest level since the common currency’s induction in 1999. The ECB tried to promote further liquidity by cutting the rate at which banks hold deposits with the ECB to nil. The hope is that this extra capital will be lent out to stimulate domestic economies. The announcements, although very much welcomed, saw EUR nose dive. GBPEUR finished the European session just shy of the 3.5 year high we saw in May and EURUSD fell sub 1.24 a five week low. European equities had a lot to absorb into their pricing and finished in the red with the FTSE up 0.14%.

Draghi’s outlook report expressed his concerns of financial spill-over from the financial markets into the real economy. This is already a serious issue. The rapid deleveraging in the banking sector has seen a sharp decline in lending to small business, job creation and, of course, growth. To be fair, Draghi has taken two clear steps to address the above problem.

Mounting pressures on the Chinese economy saw the PBOC cut interest rates for the second time in the last month. Further loosening of capital requirements is still doing the rounds in the banking circuit confirming China’s hard landing.

The first day of the Troika talks got underway yesterday in Greece. With the talks scheduled to last all month, the outcome is expected to be either a loosening on austerity measures or an extension of the fiscal adjustment period.

Yesterday was a big day for Ireland as they returned to the bond markets for the first time since September 2010. The auction signifies a quicker than expected return, which is without doubt a positive step in the right direction for the Irish economy.

Non-farm payrolls and unemployment for the US due today. Figures for May were poor so expect USD reaction and increasing QE chat should figures be poor once again. PPI for the UK out at 9.30.

Have a great weekend.

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