Central Banks to Hold Fire… For Now

LONDON | Sat Jun 2, 2012 7:39am EDT

http://reut.rs/M0oVJt

(Reuters) – The intensifying euro zone crisis and uncertain global growth outlook have raised hopes for a policy response from major central banks but, while it could be a close call, they are likely to resist pressure to act in the coming week.

The European Central Bank, the Bank of England and the Reserve Bank of Australia are all due to meet as data emerges on the euro zone’s service sector, and the manufacturing and trade performances of the big German and U.S. economies.

The main focus will be Wednesday’s ECB meeting, and whether dramatic selling of peripheral European government debt by investors in May and a flight into safe-haven U.S. Treasuries and German government bonds will prompt it to act.

One reason to doubt a major shift in policy is that, even after U.S. Treasury 10-year notes hit yields not seen in more than two centuries of record keeping, and investors began paying the German government for the right to hold its debt, the move across all markets may not warrant it.

“The stresses appear not yet to be big enough across all asset classes for the policymakers to react,” said Richard Batty, global investment strategist at Standard Life Investments.

“It all seems to be playing out in investor’s appetite for triple-A government bonds and for the dollar, but there doesn’t seem to be the volatility or sharp falls in equity markets or other stresses in the system, such as the funding market.”

In Europe, the spread between three-month Libor rates and overnight rates, seen as a measure of health of the banking system, has been stable throughout May – mainly due to the more than one trillion euros of cheap funds injected into the system by the ECB in December and February.

And while May was a bad month for equity markets everywhere and Spain and Italy in particular, the widely watched Dow Jones .DXY and S&P 500 .SPX indexes remain in positive territory for the year to date.

Those gains were under threat on Friday, however, as disappointing May U.S. jobs data sparked heavy selling, sending the MSCI world equity index .MIWD00000PUS back to where it started the year.

The VIX index .VIX, often referred to as the market’s fear gauge stood at 25 points, in line with its levels of last December but well below the 48 points seen at the height of last year’s market turmoil in August and September.

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