Choppy session after ECB becomes more dovish on prospects

<p>European stock markets endured a choppy trading session today as investors battled to second guess what actions the BoE and ECB were likely to take […]</p>

European stock markets endured a choppy trading session today as investors battled to second guess what actions the BoE and ECB were likely to take in the ensuing months after both central banks kept their respective interest rates on hold.

BoE and ECB reaction
The Bank of England kept rates on hold for the 30th month in a row at 0.5% and kept quantitative easing at £200 billion, which was of little surprise to investors. As such the reaction to stocks was initially minimal before prices started to sell off and the pound sterling strengthened, perhaps exemplifying the small hope that may have existed for an extension to the £200 billion QE programme.

It was the ECB rate decision however that was expected to be the more volatile of the two today and that aspect at least did not disappoint. Whilst Europe’s Central Bank also kept rates on hold as expected, the proceeding press conference with President Jean Claude Trichet was from where market prices took their lead.

It was surprising to see Trichet strike a much more dovish tone than necessarily most had expected with lines such as ‘we have significantly changed our appreciation of the economic situation’ and ‘a month ago we considered risks to growth were balanced, this is not the case today.’ Investors listening to that will either think the ECB which, having hiked rates twice already in the last six months, has completely lost credibility and failed to appropriately judge the situation or that the crisis in Europe has indeed deteriorated excessively over August. It was this ensuing debate that was raging in investors’ minds for much of the rest of the session and it now would not be a surprise to see the ECB cut rates by at least 25 basis points before the end of the year.

It was in the midst of the darkly dovish tone set out by the ECB that the euro was sent to new near two-month lows against the US dollar of $1.3943. Stocks however endured some volatile price swings in the midst of both announcements though losses were limited.

The start of US trading, where the Dow Jones and S&P both saw gains, also gave European markets a fillip to push higher.  Much of the gains in Europe were focused in resource and retail stocks. Resource stocks pushed higher with the miners and oil firms tracking copper and crude oil prices higher, despite the stronger US dollar. Both the FTSE 350 mining and oil sectors posted gains of around 1% going into the close.

Retail stocks also outperformed today after a slew of positive results from Morrisons’ and Home Retail Group. Both stocks traded strongly into the close on the back of their respective earnings.

Obama’s jobs plan now the focus tonight
Eyes now turn to President Obama tonight and his proposals to kick start the US labour market at a time when US unemployment remains stubbornly above the 9% level. Naturally with President Obama seeking re-election next year, many will view tonight’s speech as a potential launching pad for his case for re-election and so this may therefore include some surprisingly positive proposals. As such, the market will likely pay close attention to what is announced.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.