European Indices flat to higher ahead of ECB rate

European Indices recovered some of the ground lost from yesterdays’ profit taking, as a stronger demand for mining and commodity firms lifted the FTSE, DAX and CAC around 0.2% higher.

Contagion concerns remain
However continued weakness was seen in the Spanish stock index, the Ibex, which fell 0.7% in early trade, whilst the Portuguese and Italian benchmark Indices also underperformed wider Europe. This shows that investors remain somewhat nervous regarding the potential escalation in sovereign debt woes for these embattled eurozone states.

This nervousness was somewhat exacerbated by a move by Moody’s to downgrade Portuguese banks’ government guaranteed debt. The euro saw weakness immediately on the back of the Moody’s note this morning which came out just after European stock markets opened. That said, yields on Portuguese bonds eased somewhat today having surged in Wednesdays session but given that two year bond yields remain above 17% and near record levels, there is not much that can be read into todays easing.

Miners higher as economic data eyed
From a sector perspective, it’s the miners that are leading the charge today, with the sector higher by 0.6% in early trade with the Chinese interest rate hike now fully digested. This, alongside a 6% fall in theFTSE Volatility Index and higher commodity prices paints a picture that yesterdays risk aversion may be short lived. Much will however rely on the tone of economic data due out over the next 48 hours.

We have UK Industrial orders out at 9.30am this morning, followed by the Bank of England and European Central Bank rate decisions at lunch time, where the latter is expected to see a 25 basis point hike in rates to 1.5%. Later in the afternoon we also have the US ADP employment report and investors are likely to pay strict attention to these figures as potentially providing some clues as to what to expected from tomorrows US non farm and private payrolls. With such an intense day of data ahead of us, it is therefore understandable why today’s early gains have been relatively soft.

Whilst a 25 basis point hike will be of no real surprise should it come from the ECB at 12.45pm today, traders remain on guard for any surprise. Jean Claude-Trichet historically delivers on the clues he gives the market and so should rates remain on hold, this would be somewhat of a big surprise. Therefore, the focus on today’s decision may not actually be the rate decision itself, but is likely to be the press conference afterwards where traders will listen carefully to the language used by Trichet to guess the likely path of future ECB rate decisions.