ECB reduces rates and announces euro issue

Global markets continued to move inconsistently on Thursday. They upped for a third consecutive day in the EU, and fell in the US and Asia. The main event was a regular rate hike of the ECB, meaning significant monetary policy easing.
The interest rates were reduced from 0.15% to 0.05%, interbank offered rate (EURIBOR) – to – 0.2%. The ECB President Mario Draghi also announced plans for the European economy stimulation by buying securities from banks, asset-backed securities (ABS) in the amount of 500-700 billion euros over three years. Nevertheless, the precise sums are still to be discussed. Assets may include a variety of loans, previously provided for clients by banks: mortgage, car, credit card debts and etc. Thus, European banks would be able to pass some of the “old” credit debt to ECB, and start issuing new loans at extremely low rates. According to the EU officials, these new low-rate loans will facilitate the EU economy recovery. Unlike the US QE3 imposed by the Fed, the European ABS program is not limited by government bonds. In both cases, the necessary money is just supposed to be issued. Due to the ECB monetary policy easing, there will be a rise of 0.9% in the EU GDP this year, and 1.6% in 2015. CPI will tick up to 0.6% from the current 0.3% by the end of 2014 and to 1.1% in 2015.

The ECB actions resulted in further euro depreciation and rising European markets. In previous overviews we pointed out that it is the most consistent market response. Money issue reduced the single currency rate, and the supplementary liquidity is pushing up the security prices. Note that positive macroeconomic data on German Factory Orders in July was released yesterday in the EU. This morning the positive data on German production output growth has been reported. Despite the fact that it was expected, this data contributed to a rise in German stock index DAX. Other indices “made no headway”, since investors do not want to take risks before the significant data on the US labor market released. Today at 9-00 СЕТ the EU GDP for the second quarter in the second reading is to be reported. It is expected to be unchanged compared to the one of the first reading, and will make up +0.7% yoy.

US stocks slipped slightly on Thursday. We assume that the projected US rate hike would have a negative impact on the stock market and support the dollar index growth. Note that stock prices drop yesterday was accompanied by the rising trade volume on US exchanges. It made up 5.7 billion stocks, which is 19% higher than the 5-day average. US Non-farm Payrolls and August unemployment rate are to be announced today at 12-30 СЕТ. Yesterday data on Non-farm Payrolls by ADP agency was negative. Market participants fear the official data for today to be weak as well. Futures on American stock indices are falling.

Nikkei did not had any extra rise yesterday. Investors did not favour the data that the BOJ could revise downward the economic growth forecast. This morning the performance of Coincident and Leading indices in July appeared to be negative, this data dragged down Nikkei. Japanese yen rates are still sagging (rising price on the USD/JPY chart). There will be no Japanese economic reports released for today. The July Trade Balance, Q2 GDP in the final reading, and other data will be announced on Monday morning.

Oil prices fell yesterday, due to the US dollar strengthening. Today the prices are upping slightly. Probably, investors are still reacting on the weekly reduction of the US oil inventories. Thus, petrol inventories slipped 2.32 million barrels at the forecast of 1.4 million; oil – 905 thousand at the forecasted 1 million. Note that hurricane “Nortbert” is being formed now in the Pacific Ocean. It can affect oil extraction and imports into the United States, and the grain crops. Grain prices have also increased slightly.