Economic Insights

Economic Insights

Little volatility overnight






The US Equities market was rather quiet overnight with much lesser trading volume because there were no major economic releases and investors felt the high uncertainties on the central banks’ next move, especially by the European Central Bank (ECB).

From the chart below, it shows that the overnight trading volume over the Dow Jones Index has decreased sharply because traders were more cautious on the events happening over the next few days.




Source: BloombergClick the image to enlarge

Previously, I have seen many bailout and liquidity injected into the market when the currency bloc were facing crisis. However, fundamentals have not changed at all; the economic activities have deteriorated instead, which means monetary policy and liquidity that were provided only bought more time during crisis. Yesterday, the former President of World Bank Robert Zoellick warned that Spain and Italy need to do structure reforms urgently and that would be a sustainable strategy instead of monetary policies.

Italy’s 10-year bond auction was held yesterday, the average yield was brought down to 5.96% from previous 6.19% by the rising speculation that the ECB is going to intervene the bond market, bid to cover ratio was nearly unchanged at 1.29X from previous 1.28X. The government sold EUR 2.485 billion for its 10-year notes yesterday.



Cautious theme is likely to continue before the European Central Bank’s (ECB) meeting

Market players anticipate the key event this Thursday with a high expectation because ECB President Mario Draghi has put his personal credibility on the table, thus traders are betting that he can’t afford to disappoint the world this time because there is a potential risk for an escalating sovereign crisis in the currency bloc if he fails to convince the market that the ECB is going to intervene.

Before the German court approves the European Stability Mechanism (ESM), the current instruments that the ECB is able to tap on are the European Financial Stability Facility (EFSF) and the Securities Markets Programme (SMP), and I believe those are Draghi’s current proposals; I do not expect these 2 instruments to solve the debt crisis alone, but the willingness to act from the ECB is able to buy more time. However, some German officials reiterated that Germany has opposed to the Euro bonds or other collectivized debts, and only supports for independent operations by the ECB. German Chancellor Angela Merkel’s coalition partners also have some concerns on Draghi’s proposal.

Germany and the Euro Zone’s unemployment will be released later of the day. Survey shows that the number of jobs seekers in Germany has increased, thus the unemployment rate might have a chance to be more than previous month’s 6.8%, while the EU unemployment could hit another record at 11.2% because the economy has deteriorated further on the rising uncertainties and budget cuts in the region. Many companies are struggling with the “fiscal crisis” beyond the debts crisis by cutting large amount of jobs.



Source: BloombergClick the image to enlarge



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