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UK stock market commentary (September 06, 2012): ECB needs an MOT

All eyes are on the ECB today but already we have seen leaks from the central bank which has almost entirely told us what to expect. Unlimited bond purchases planned for the longest maturities which they claim to be within their mandate, which is 3 years. Unfortunately for them though so far, apart from a rally in the euro, the reaction from other risk assets was muted and investors remain unconvinced. Perhaps the finer details will add more meat to the bone over lunch time as the market wants to see if Mario Draghi will be specific in mentioning any yield or spread targets. Just like the Swiss central bank who said they would defend the 1.2000 level for the EUR/CHF at all costs at the end of last year and since then the rate has not deviated from that path, investors are holding onto the belief that the ECB will show similar resolve to cap the borrowing costs of the PIIGS.

The good news about what is expected to be announced today is that we will have yet another acronym to talk about in the form of “MOT” and if ever there was an economic area that needed an MOT check up it’s the eurozone! So the Monetary Outright Transactions are designed to rein in peripheral states’ borrowing costs urgently and for now the markets are just biding their time ahead of hearing the details of the plans. Unlike the SMP before it which was a rushed initiative back in May 2010 to deal directly with Greece, this time round serious discussions and thought have gone into the MOT, including to a relative extent important buy-in from Germany.

The real issue is that it still isn’t going to be the big bazooka that everyone wants to see. Like most other central banks the ECB still isn’t the lender of last resort, so European banks don’t have the guarantee that they will step in if required. Maybe another LTRO (remember that acronym?!) might be announced as well or at least given a date in time for it to happen, but so far given the reaction from equity markets, investors are going into today’s meeting with very low expectations.

The FTSE is edging higher however having opened in positive territory and is trading at 5780 at the time of writing. Market action may be limited and before the ECB rate decision of course we have the BOE meeting which has rather been sidelined in recent days. For the UK at least this week has shown a rare degree of strength in the economy after both manufacturing and services PMI surveys came in higher than expected, so for their part at least we can’t expect to see any major shift in policy.

Then later on we get the US ADP payroll figure a day later than usual due to the bank holiday across the pond on Monday. Forecasts are for 140k new private jobs to have been added in August.

Speculation the European Central Bank might announce its plans to purchase unlimited three year government bonds at its meeting later today offered the shared currency some support yesterday. However, the rise of 35 pips to 1.2602 could also suggest that in itself that would not be enough. Like always, the devil is in the details and investors will be keen to find out the whole approach after growing slightly tired of general promises. This morning the euro is trading at 1.2605, within touching distance of a two month high.

Gold retraced $1.85 to 1693 yesterday after some reports in the media speculated the inflation would be hardly changed by the planned bonds buying in Europe. The yellow metal is perceived as a safe haven and good hedge against fear of inflation so tends to go up in value every time the paper currency has the potential to be devalued. In the meantime, the 1700 mark is so close that it has already tempted buyers pushing it into new recent highs trading at 1705 at the time of writing.

Uncertainty in the global markets kept energy investors nervous yesterday who avoided any fresh commitments, happy to play the waiting game. Moreover, the weekly crude inventories report will be released a day later due to the Labour Day holiday. So, no surprise to see the WTI crude prices finishing not far off the starting level, 25 cents down at $95.36.