Euro interest rates held at 1pc by ECB

As expected the ECB kept homes loans rates on hold at 1%. 

They announced that it will continue to scale back their special lending measures as expected and equally as expected Trichet dodged the difficult bullets concerning Greece and gave little away. 

Yesterday's Greek bond issue was a real success and this gave the markets a boost backing up the recent austerity measures introduced- the market is aware that we are not out of the woods but this certainly helps. 

Expect further wranglings with Greece but nice to get some good news for a change; today the German and Greek heads are meeting. 

Should be a spicy meeting after yesterdays comment from the German Economics Minister who said that the German government has no intention of offering Greece "even one cent" and that each country has to take care of its own affairs…..would be nice to be a fly on the wall for this meeting.

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Sterling holds steady for now

Not much movement overall by Sterling as the markets paused on selling the Pound. 

This morning we have in fact made some gains back and as we stand we are holding just above the key 1.10 level and 1.50 on GB Pound/US Dollar The 1.50 level on GBP/USD is a crucial level to hold above and will help to steady the ship and prevent further selling pressure. 

This morning we have seen UK PMI data come in much stronger than expected rising to 58.40 compared to the 55 expected and giving the best reading for over 3 years. 

On top of this consumer confidence rose to 80 and a 2 year high as consumers look ahead to a brighter 2010 for the UK economy. The good data this morning was a huge breath of fresh air for sterling giving it a welcome break from the selling momentum.

EUR/USD has picked up this morning beyond 1.36 following the leaked news of an austerity package for Greece totalling 4.8 billion euros. 

There is still uncertainty on the level of support that Greece will receive from the EU and the Greek PM tactically said that the cabinet may turn to the IMF if the EU does not give support. Nice move. If we get further clarity on the level of EU support then this should lift the euro further. 

In addition it will help lead to selling pressure on USD and the JPY and hopefully boost the Pound as confidence improves.

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US to maintain low loans interest rates

Not a surprise but the markets appreciated the confirmation from the FED which removes any potential near term surprises from the Fed. 

Equities picked up on the news but risk appetitie is far from returning. Europe came back to the fore and this morning the markets are in a tailspin of fear again as the threat of a sovereign downgrade looms over Greece. 

This opens up the possibilty of Grrek bonds being illegible with the ECB, making it more difficult to borrow.

The Yen is flying in the markets today and has pushed below 89.50 against the USD and pushed GBP down to 136.82 as we stand. The Yen is being favoured as a safe haven after recent strong economic data; the USD has also experienced gains again today with EUR/USD dropping as low as 1.3449 and GBP/USD to 1.5270 a new 9 month. 

Big day tomorrow for sterling in the revision of the Q4 2009 GDP- it is expected that it will be revised up to 0.2% from 0.1%- we need as expected or better to stave off further sterling selling. 

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Sterling rides the currency markets rollercoaster

The good start for Sterling soon lost momentum following the Bank of England's inflation report and Mervyn King's press conference. 

The markets and sterling were initially boosted following a report in Le Monde newspaper of a Germany led aid plan for Greece. The ECB did not comment on these reports but the rumour alone was enough to drive the markets higher with the USD shedding some of its recent gains along with the Yen- GBP/USD pushed through 1.5750 and GBP/EUR 1.1425. 

However the markets made a quick U-turn as party pooper Mervyn King dampened the mood with a dose of reality- the key blow was the affirmation that it is far too early to conclude that no more QE needed.

This forced GBP/USD back to 1.5650 and GBP/EUR to 1.1350. Expect the "will they or wont they" that is the ECB assisting Greece to dominate the markets over the coming sessions.

In economic data from the UK earlier December Industrial production output came in stronger than expected at +0.5%. Good news for the UK economy but not significant enough to lift sterling. 

Sterling is suffering at the moment as it is being sold on the fear factor. Later today we have Bernanke’s testimony to the congressional committee- this could lead to some US dollar volatility.

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Fear grips the markets

Volatility in the money markets over the last 24 hours has been staggering! 

The main economic events yesterday were related to the UK and European central bank decisions- however this was not the driver for the volatility.

The exact location of the fear was GPS…Greece, Portugal and Spain. 

There was a scramble for safer shores in the USD and the YEN and out of the euro and higher yielders and to some extent the pound as panic swept the markets. 

Escalating debt concerns are increasing in these European economies and this drove stocks and commodities lower- debts spreads between the good eggs and bad eggs widened considerably and could increase further.

The market clearly needs some reassurance in regards to the bad economic apples of Europe and ECB president Trichet did little to reassure the markets yesterday so we await a viable plan from each economy.

It seems the simmering problems perceived for some time within Europe are finally coming to the boil and the question is can each economy sort out their own mess? 

You could also throw Ireland into the equation to formulate the PIGS of Europe- if they cannot reduce their debt- will the ECB and IMF offer a trough for aid? 

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Quantitative Easing QE- are we done?

Today the markets are be focused upon the interest rate decisions from the Bank Of England and the European Central Banks. 

First up is the BoE- the markets will be waiting to see what the MPC do with QE- the UK asset purchase scheme. Will they hold firm at the current level of £200 billion? Will they expand by a further £25 billion? Or will they signal the completion of the asset purchase- or at least pause? 

There are valid arguments for all scenarios, however I feel that the most likely scenario is that the Bank will not extend now but leave the door open for future extension if deemed necessary. For sterling any signal on further extension would be negative and any closure or pause should be positive.

For the ECB the statement after the meeting will be all important and the situation in Greece, Spain and Portugal will be scrutinized. Trichet usually dances through tough questions without giving too much away so we are not likely to get any major surprises here. 

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Markets await central bank decisions tomorrow

Quiet economic data today with the focus looking forward to tomorrow's interest rate decisions from the Bank Of England and the European Central Bank. 

There is a possibility that the completion of the Quantitative Easing programme will be announced for the UK- however the ever cautious MPC will likely leave the door open for more if deemed necessary. Either way a pause or a cessation in QE should be largely beneficial for sterling in the short term. 

The statements following the respective decisions from the BoE and ECB will again be the highlight as future policy sentiment will be predicted by the markets.

Sterling had a bright start today against the USD pushing back through 1.60 and hitting a high of 1.6069 before slumping back to earlier levels. 

Reports of Asian Central banks buying GBP/USD earlier before the rally was sold back lower. EUR/USD also stuck its neck back above 1.40 again this morning to a high of 1.4026 before falling back to 1.40. 

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Euro rumours the centre of attention

Following yesterday’s potential minefield that was the ECB meeting, the market mover today was a rumour that went round the Far East in the early hours that the German Chancellor, Merkel, was ready to resign her position. 

This appears to stem from a report in Time magazine that was negative on the support that Frau Merkel is currently receiving. This rumour was swiftly denied by a German Government spokesperson but the damage was done and the Euro dropped sharply all round. 

In fact the move was then compounded as traders re-visited the comments from Trichet in his post-ECB policy meeting press conference.

Although he had said, when grilled by the reporters about Greece’s debt problems and the possibility of the country dropping out of the Euro, that he did not comment on ridiculous hypotheses, the whole question of Eurozone sovereign risk and the support that namely Greece, Portugal and Spain currently enjoy, was brought back to the table.

Sterling enjoyed a good spell and with the 200-day moving average at around 0.8850 being breached, traders saw a raft of stops taken out and a quick dip down to the 0.8825 Euro technical support. 

A weekly close beneath 0.8825-30 suggests a move lower towards 0.8500 but I feel that this is a move too far. The whole Greek/Portuguese situation has been overdone and it would not surprise to see traders looking at current rates as an opportune level at which to re-establish Euro long positions.

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Pound slides after QE expansion

The Pound dropped sharply on Thursday morning after the Bank of England extended its asset purchase scheme by more than expected after its policy meeting.

The Bank announced a £50bn extension to its programme to £175bn as it continued to use a policy started in March of quantitative easing to lift the UK economy out of recession.

”The Committee expects the announced programme to take another three months to complete. The scale of the programme will be kept under review,” the Bank said in a statement.

Ahead of the decision, forecasters were evenly split as to whether the Bank would announce that it planned to spend the remaining £25bn of the £150bn earmarked for its asset purchase programme or would remain on hold.

The more aggressive action sent sterling and gilt yields sharply lower.

Sterling , which on Wednesday hit a 10-month high of $1.7042 against the dollar, dropped 0.7 per cent to $1.6868, fell 0.5 per cent from a one-month high to £0.8529 against the euro and lost 0.2 per cent to Y160.86 against the yen.

The yield on 10-year gilts fell 14 basis points to 3.68 per cent, while the more interest rate sensitive 2-year gilt yield dropped 17 basis points to 1.1 per cent, not far from the low just above 1 per cent it hit in December.

The Bank also kept UK interest rates on hold at 0.5 per cent, but this was no surprise to investors.

Meanwhile, the euro held steady around multi-month highs against the dollar on Thursday as traders awaited the outcome of the European Central Bank’s policy meeting.

Like the Bank of England, the European Central Bank was widely expected to keep its main lending rate at 1 per cent after its policy meeting.

But analysts said the post-decision press conference with Jean-Claude Trichet, president, would be scrutinised for any signs that he had become more upbeat on the prospects for the region’s economy or any announcements over unconventional monetary policy measures.

Increased investor optimism over the prospects for global growth have boosted both the euro against the dollar this week, stemming haven demand for the US currency as traders abandoned the relative safety of the dollar in search of greater returns elsewhere.

On Wednesday, the euro hit a high of $1.4446 against the dollar, its best level since December.

Much of the optimism over global growth was provided by a string of above forecast surveys of activity in the manufacturing sector across the globe early in the week.

But analysts said some caution had been evident in the rally in riskier assets after the Institute for Supply Management’s survey of the US services sector came in below forecast and a survey of employment in the US private sector also undershot expectations on Wednesday.

The dollar also edged higher elsewhere, climbing 0.3 per cent to SFr1.0642 against the Swiss franc and rising 0.6 per cent to Y95.46 against the yen.

Elsewhere, the yen suffered as Asian equities posted strong gains, denting haven demand for the Japanese currency.

The yen fell 0.2 per cent to Y137.30 against the euro and lost 0.6 per cent to Y80.24 against the Australian dollar.

The New Zealand dollar was also hit after figures showed employment in the country dropped by more than expected in the second quarter.

New Zealand unemployment jumped to its highest level since mid-2000, sending the kiwi down 0.5 per cent to $0.6699 against the dollar.

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ECB lends record €442 billion to banks

The European Central Bank said today that it lent a record €442.24 billion at 1 per cent in one year funds to commercial banks.

The previous record for the central bank’s refinancing operations was €348.6 billion in two-week funds on December 18, 2007 as crisis-hit commercial banks scrambled to bolster their balance sheets during the crunch year-end period.

Interest rates overall would be expected to remain low, a key issue as the eurozone grapples with what is likely to be slow recovery from the worst global recession in more than 60 years.

The ECB has resisted the so-called "quantitative easing" practised by the US Federal Reserve and Bank of England — essentially printing money to buy government and private debt to boost recession-hit economies.

The ECB, however, has generated a flood of cash through loans that will now extend to 371 days, or 12 months, from one week to six months in the past.

Analysts had expected banks to leap at the chance to get an unlimited one-year loan at the ECB’s lowest rate ever.

The central bank has said that in subsequent one-year operations — the next is scheduled for September 29 — the rate could be higher depending on market conditions.

By providing huge amounts of cash to commercial banks, the ECB aims to lower the cost of borrowing by companies and individuals, and spur economic activity.

Money markets influenced by central bank operations determine the flow of credit for vast numbers of people around the globe, from managers trying to fund their businesses to families and students seeking mortgages and personal loans.

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IMF tells Europe to come clean on bank losses

The International Monetary Fund has called on eurozone governments to take urgent steps to clean up the banking system as losses mount, and advised the European Central Bank to prepare "all unconventional options" in case the crisis deepens.

"To restore confidence, you need total disclosure of possible losses," said Dominique Strauss-Kahn, the IMF's managing director. "Not only losses which are linked to the original sub-prime crisis, but also the losses linked to the slowdown in the economy, and impaired assets."

The latest IMF report said the chance to raise fresh bank equity while optimism lasts should be "seized without delay" and demanded a "comprehensive review to assess capital needs and viability."

"Stresses persist, conditions for access to bank lending are tight, funding costs remain high. Sizeable losses lie ahead as the recession unfolds. The financial sector is hamstrung in fulfilling its vital intermediation role."

The IMF says eurozone banks will need to raise a further $375bn (£235bn), compared to $250bn for US banks, and has called for a stress-test along the lines of the US Treasury probe.

There are widespread concerns that Germany in particular is hiding bank problems until after the September elections, using its "bad bank" scheme to keep "zombie institutions" alive.

The eurozone is not yet out of the woods, and risks sliding into a deeper downturn. "Adverse feedback loops between the financial and real sectors could trigger a protracted deflation," said the fund.

The euro fell sharply, although analysts said Ireland's troubles may ultimately pose a greater risk for sterling for contagion reasons. S&P has threatened to strip Britain of its AAA rating unless London gets a grip on spending. Austria is also in the firing line as concerns grow over bank exposure to Eastern Europe.

Ireland's woes are compounded by the crushing defeat of the premier Brian Cowen's Fianna Fail, which lost all its seats in the EU elections.

In Spain, the government announced a €9bn fund to rescue banks hit by the property crash. PriceWaterhouseCoopers said the sum fell far short of what is needed, fearing that Spain's banks will need at least €25bn and perhaps as much as €75bn in fresh capital. Non-performing loans will reach 7pc to 8pc, double the level in March.

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European Central Bank falls into line and embraces quantitative easing

ECB falls into line and embraces quantitative easing by following the policy first adopted by the Bank of England and America's Federal Reserve.

The European Central Bank has cut interest rates a quarter point to a record low of 1pc and embraced quantitative easing (QE) for the first time, catching markets off guard with plans to buy €60bn (£53.5bn) of covered bonds.

The hotly-disputed move to purchase assets brings the ECB into line with the central banks of the US, Britain, Japan, among others, that have begun "printing" money to stave off debt deflation.

The step-change in policy follows an open clash within the ECB's governing council over its handling of Europe's worst slump since World War Two, pitting national governors from southern Europe and Ireland against the ECB's German-led hawks. Bundesbank chief Axel Weber has fought a rearguard battle to head off QE, calling it an "undesirable option" that risked inflation later.

The majority also overruled his insistence on a 1pc "floor" for interest rates. Jean-Claude Trichet, the ECB's president, said the bank had not ruled out further cuts, "depending on future circumstances".

The refusal to accept Frankfurt's lead is a turning-point for ECB, which inherited its authority a decade ago from the Bundesbank. The upsets touches on a raw nerve in Germany where critics have always suspected that EMU would turn "soft". It may set off a political backlash.

The ECB also extended its liquidity scheme from 6 to 12 months and opened its window to the European Investment Bank, giving it a new crisis role.

David Marsh, author of The Euro - The Politics of the New Global Currency, said the ECB is loath to follow Anglo-Saxon banks in purchasing government bonds because this would give most help to big debtors such as Greece and Italy. "They don't want to be seen as bail-out merchants by acting as a bond purchaser of last resort for hard-pressed nations," he said.

The IMF says Europe's banks have written down just 17pc of likely losses, compared to half for US banks. They may need $500bn in fresh capital. "If the IMF is correct, the risk of a credit crunch is bigger than the ECB likes to admit," said Mr Annunziata.

The European Commission has slashed its eurozone forecast to minus 4pc and highlighted the danger off a more vicious downward spiral if "adverse non-linearities" take hold. "One cannot exclude the risk of social and political unrest," it said.

The ECB's policy shift is a vindication for Cypriot governor Athanasios Orphanides, a 17-year veteran of the US Fed, who has battled tenaciously for bold action.

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Wise Money radar set on Thursdays ECB rate decision

The European Central Bank (ECB) surprised the markets by only cutting interest rates by 25 basis points to 1.25% last month.

A record low but when compared against the UK interest rates of 0.5% and against the US of 0-0.25% then comparatively still high in the current global climate.

The markets wanted to see more aggressive action amid rising unemployment and shrinking growth and all eyes will turn to the next ECB rate decision on Thursday. It is expected that another 25 basis point cut to 1% will materialize and the ECB may engage in additional "non conventional" measures- basically some form of Quantitative Easing to help the economy.

Stateside, the Fed plans to deliver results of stress tests on US banks to executives today that may show about 10 firms need additional capital to weather a deeper recession. An obvious way for banks to fill their capital requirements is via conversion of preference shares to common shares.

Last week, the Fed delayed the release of the tests that were originally scheduled for yesterday, as banks challenged some of the conclusions. 19 banks have been stress tested. Citigroup and Bank of America were allegedly among the banks found to need additional capital. It is rumoured that both firms disputed the Fed's determination.

Yesterday Citi rose 7.7% and Bank of America 19% after denying it was working of a plan to raise $10bn. I would be surprised if we didn't hear more soundbites about the stress tests. The results are likely to be made public later this week.

GB Pound is performing well testing the 1.50 level against the USD. The last time we were at this level was in mid April. A break above this level opens up the 1.52 level where we saw resistance in early January. GBPEUR has rallied and is currently trading at 1.1270 level, still off the 1.1381 high seen in mid April.

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Risk aversion trades take centre stage

Swine Flu continues to dominate wise money chatter.

Unfortunately it is the unknown that is causing the problem rather than anything definite and until we know whether the infectiousness of the virus, which originated in Mexico, can be contained by the World Health Organisation then we won't be sure of the financial impact.

The death toll in Mexico has risen to 149 and the WHO has upgraded its alert level to phase 4, one stage below the much more serious pandemic category. Phase 4 was the level at which the latter stages of the SARS outbreak was categorised.

Initially the Mexican Peso and the Antipodean currencies were hit hardest but concerns remain that if the situation worsens then sectors other than just agriculture will be affected.

The mediterranean countries are earmarked as likely targets (Portugal, Italy, Greece and Spain) with a downturn in air travel and tourism at a time that these countries can least afford it.

The Euro slipped sharply, not only on the move into Dollars but also following comments from ECB members Nowotny and Trichet. The former stated that Eurozone rates would stay low for a long time and that the Central Bank was ready to use additional measures if necessary.

Trichet reinforced this message saying the ECB will take decisions on new measures at their May 7th meeting- for the next week or so, the Euro is vulnerable all round.

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Eurozone interest rates at record low of 1.25pc

The European Central Bank has cut interest rates in the eurozone to a record low of 1.25pc, down from 1.5pc.

Economists had been expecting a bigger reduction of half a percentage point to 1pc, but speaking at a press conference after the monthly decision ECB president Jean-Claude Trichet did not rule out further cuts.

He said that rates may be cut "in a measured way," adding that while inflationary pressures were subsiding, the outlook for the economy remained poor.

"The latest economic data and survey information confirm that the world economy, including the euro area, is undergoing a severe downturn. Both global and euro area demand are likely to remain very weak over 2009, before gradually recovering in the course of 2010," he said.

The ECB's Governing Council has reduced interest rates by a total of three percentage points since early October, after the global financial crisis intensified following Lehman Brothers' collapse in September.

Mr Trichet said the ECB would announce "non-standard" measures at its policy meeting in May in an attempt to stimulate the eurozone economy, which officially entered recession at the end of last year.

The Organisation for Economic Co-operation and Development (OECD) predicted earlier this week that the eurozone economy would contract by 4.1pc this year. That is a significantly bigger drop than the 2.2pc to 3.2pc fall forecast by the ECB.

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Wise Money eyes on the ECB & G20 today

The G20 Conference in London stole the Press Inches but it was the yesterday's economic and trading data plus financial announcements that provided the market with more interest.

Let us start with the Australian Trade numbers for February reported earlier today. As expected, the surplus rose sharply to report a surplus of A$ 2.1 billion as exports rose following a recovery in agriculture plus the anticipated increase in Chinese buying of relatively cheap hard commodities.

The currency remains firm with attention turning to the May budget with hopes of additional stimulus measures being revealed. As a bell-weather for global activity, the Aussie economy is as good as any to watch.

From the US we had several very interesting pieces of news - both good and not so good, but Wall Street ended focusing on the positive and the DJIA closed on an up note, +2.01% higher.

An indication of how slow the recovery of the US economy is going to be is the massive stock building of petroleum products as reported in yesterday Oil Inventory Data Release. The number is running at 4 times the 5-year average and indicates that OPECs best efforts to stabilise their market are not working.

With the ECB meeting scheduled for later today, this might very well leave Sterling as the Buyer's choice (for today anyway) but the European Central Bank have been known to scupper the best laid plans before…..

Earlier this morning, the Nationwide revealed that house prices in March rose by 0.90% month-on-month versus a 1.90% fall in February, this, the first rise in the index since October 2007.

Wise Money suggest an aberration rather than a turning point.

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Where now for the pound?

Following another rollercoaster week in the currency markets we have seen the Pound rally and then submit its gains.

Today and tomorrow we have the G7 meeting in Rome and the recent weakness in the pound is expected to be a confrontational topic.

It is expected that French and German ministers will confront the chancellor following the dramatic sell off in the pound over the last year- the currency has evolved from a strong safe haven currency to a shadow of its former self- losing over a quarter of its value.

Today we have seen GDP data from Germany showing a larger than expected contraction of 2.1% and following this we have seen EMU GDP contract by 1.5%- this is the deepest contraction on record and emphasizes today’s contraction in Germany with Spain, France & Italy also posting negative GDP.

This is worrying news from the Eurozone and there is little light at the end of the tunnel- GDP is expected to fall by 3% in 2009.

Looking at the market fluctuations we have understandably witnessed lots of volatility- this morning we have already seen early gains in the pound against the dollar and the euro.

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Sterling surges on Bank of England cuts

Yesterday'€™s much anticipated 0.5 % cut by the BoE was greeted with derision from savers.

However the currency markets reacted in a positive manner, continuing to buy Sterling - pushing it to a two month high against the Euro to €1.15 and above $1.45 against the dollar.

Sentiment is key and for the moment the markets are backing the BoE and the UK government'€™s fiscal policy compared to the rigid stance from the ECB.

Yesterday it left rates unchanged but heavily intimated that rates would come down next month - its procrastination on fiscal policy is in the short term driving Sterling higher against the Euro.

UK economic figures out today in the form of Industrial Production and PPI could stop this Sterling rally, so don'€™t be surprised to see a Friday sell off.

Rumours of intervention from the Bank of Japan saw USD/Yen move away from 89 and this ongoing threat could see the Dollar move higher.

Gold continues to move higher. It broke the $1000 barrier as more buyers entered the market. However their appearance did not support traditional commodity currencies such as the South African Rand and Australian Dollar, which continue to fall as their domestic outlook worsens.

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Interest rates announcements due soon

Despite the fact we are heading into the Bank of England'€™s rate decision tomorrow Sterling is holding up pretty well.

There is no doubt Sterling has a lot of in built bad news already in the price and a 0.5 % base rate cut is already priced in some may even argue that 1% is already accounted for.

On the other hand the ECB still stubbornly refuse to move their interest rate down from 2% and tomorrow we expect unchanged.

Short term GBP EURO could move lower on the back of the widening interest rate differentials, however the continuing downgrading of Euro Zone growth forecasts can only mean further pressure on the Euro and Sterling could be the main benefactor of this.

In the US the Obama effect looks like it could be running out of steam and the US$ will come under pressure as the Treasury struggles with its exploding balance sheet.

The short term rally we saw in the Australian Dollar has also fizzled out as the market comes to terms with what could be a protracted slowdown down under especially as the price of commodities continues to fall.

And over to Russia the fun continues as the Central Bank desperately tries to hold up a freefalling Rouble, a thankless task and this is also putting pressure on Poland and Hungary as their currencies get drawn into the global risk aversion play and continue to fall.

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Chinese New Year Holiday

Plus today's Australia Day Bank Holiday heralds a very thin Far Eastern market for the next 5 days.

In the UK, Alistair Darling is bemoaning the recent moves by the markets in response to the Bank rescue package established last week, saying that the City has missed crucial details and that the package will work. Toys and pram come to mind.

The out-going MPC arch-dove, Blanchflower was also in print over the weekend doing what he does best, talking UK interest rates lower. He was however, more bullish than most in his medium term assessment for the UK with a fairly upbeat prognosis as opposed to the outlook for the Eurozone.

Talking of the Eurozone, there were mixed messages from ECB members with the usually less than hawkish Mersch stating that he would be uncomfortable with the risks of cutting rates much further from the current 2% as this would risk the ECB losing policy control.

Weber meanwhile, who is normally one of the more hawkish of the ECB policy board, admitted that the downturn in the economy had been more prolonged and steep than had been envisaged. Even though no comment was made on interest rates directly, the fact that Weber's opinion might have softened, could be very important going into the next meeting.

This week we have the Federal Reserve meeting which one would not expect to produce anything that we have not heard/seen before. Other than that, market participants will await any positive signs from the bits of economic data coming through as well as waiting comments from participants at the upcoming Davos get together.

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ECB cut 0.5% as expected

In the market, the ECB did cut rates but only by the very minimum required.

The President, M. Trichet then compounded the disappointment by implying that March would be the next €˜important meeting and as such, no further rate adjustments would take place before then. The Euro slipped against all other currencies during the trading day.

Concerns were more directed towards developments in both the US Banking system, following the results from JP Morgan, and the UK where estimates of additional capital required by the major domestic Banks, combined to send Bank shares spiralling down and cause rumour after rumour of possible events over the weekend.

Today we really wait for inflation data from the US followed by industrial production and then the Michegan sentiment survey. Following a proliferation of comment from Fed Members last evening, the Dollar has started on the back-foot but ahead of the long weekend in the States expect little further action until 1.30pm.

No data expected from the UK but we expect an announcement from the FSA some time today lifting the ban on the short selling in financial stocks. That won't help the current slide in shares.

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ECB tweaks deposit rates to encourage more interbank lending.

The ECB cut the rate it pays to deposit overnight money and increased the rate it charges for emergency loans.

The concern from the ECB is that whilst they have slashed their base rate at the fastest pace in the ECB's 10 year history to 2.5% it may not be enough to stimulate the economy as long as banks are refusing to lend to each other.

Banks globally have little confidence in one another and consequently are hording cash and tending to deposit with the Central Banks.

From 21st January the ECB's deposit rate will drop to 100 basis points below the base rate and the marginal lending rate will be increased to 100 basis points above it. Euribor set yesterday at 3.13, the lowest level since July 2006 – but still 63 bp above the base rate; in the seven years to August 2007, before the credit crisis began, the gap averaged only 15bp.

Trichet said on 15th December that there is a limit to how far the central bank can pare rates whilst yesterday Charles Bean (a UK MPC member) signalled that the UK could see rates reach 0%.

This divergence in outlook is continuing to stoke the negative outlook for the sterling euro cross. No doubt Euro zone exporters are hurting as we look towards parity. GBPEUR is currently trading at 1.0617 levels having rallied slightly from the record low seen at 5.20pm yesterday of 1.0456.

Sterling was hammered again yesterday, it is currently trading arond 1.5030 level but looks set to test yesterday's low of 1.49. This decline in Sterling from a peak of 2.0335 on 13th March to the year low seen on 4th December of 1.4680 represents a drop of 27.8%. This is the steepest yearly decline since the height of the Great Depression in 1931 when the pound was forced off the gold standard.

France's manufacturing confidence fell to the lowest level in 15 years in December, adding to signs that Europe's third largest economy may move into a recession for the first time since 1993.

Elsewhere, the Bank of Japan cut its benchmark interest rate to 0.1% (from 0.3%) in an effort to boost the economy. JPY saw a 13 year high yesterday against USD of 87.14 and is currently trading at levels of 88.55.

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Interest rate announcements are in the spotlight

But neither having a materially long-term effect on exchange rates. The market perception of lower interest rates to come remains unchanged in the market but differences of opinion as to magnitude of cut and timetable are starting to emerge.

Comments from Trichet and Andrew Sentence yesterday added to the uncertainty with the former intimating a pause in ECB rate cutting whilst Sentence appeared to argue both camps for Sterling.

The traditionally arch-hawk of the committee warned of a further weakening of the manufacturing sector in the UK (this followed the report that industrial output in October had fallen by 4.9% y-on-y - the biggest drop in over 6-years) with the recession lasting longer and going deeper than had been previously forecast.

He warned however that policy makers needed to look at different methods for handling the problem implying that interest rates being continually being reduced has less and less impact going forward.

The Zew data from the Eurozone and Germany yesterday were terrible which immediately caused the Euro to tumble through 1.2800. Rumours of semi-official demand however, caused the market to pause which was enough to see it rise sharply back towards 1.3000 where it stopped and near to where we start today.

Sterling fell on the weak UK data and then was hit with the double whammy when Euro rose against the Dollar. This left the cross hitting a new all-time low below 1.1400. This afternoon's testimony in front of the Treasury Select Committee by the Chancellor, Alistair Darling looks like the next chasm for Sterling to negotiate. Although neither party will be out to put the skids under Sterling, the conversation and comment might be viewed very nervously from abroad.

Elsewhere the Canadians did indeed cut their rates as expected but by a larger amount, 0.75%, than had been anticipated. More rate cuts to come from them in the near future. The same conclusion can be reached for Sweden following the release of the sharpest fall in inflation (down from 4% to 2.5%) in their country in 15-years. The Riksbank are expected to progress with their rate cutting programme, with a target of 1% being achieved over the next 3 policy meetings.

In the US, the extreme short end of the Treasury market remains the focus. On Monday, the 3-month bill auction was completed at a yield of a mere 0.005%, but that was surpassed by the 4-week bill sale last night. The minimum bid rate was set at 0.00% with the 'high' bid being established at -0.06%.

In addition, even with a zero yield, the issue was covered 4.20 times and amazingly €˜non-professionals' took 47% of the total - the second largest participation on record. In other words, it wasn't just dealers causing those incredible results - the non-financial market is also quite willing to accept a zero yield (or less) in return for through year-end safety.

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UK tax increases loom

For those of you who have been away on a desert island for the past few weeks, today sees the UK Chancellor unveil his Kick Start for the economy thinly disguised as his pre-Budget Statement.

It is difficult to ascertain just how much of the recent press coverage is actual and how much is speculative. Suffice to say that whatever emerges will be the blueprint for the economy for the next couple of years and the analysis of the measures will determine the immediate direction for Sterling on the exchanges.

The one factor that is a cast iron certainty is that the BoE/MPC will be cutting rates further in December. The statement to Parliament commences at 3.30 this afternoon.

Also on interest rates. The ECB President said on Friday that the ECB could cut interest rates again at their meeting next month. These comments were echoed by 2 other €˜high powered members of the Central Bank but it wasn't until ECB Director and Chief Economist Weber said the same thing later in the day, that anyone took any notice.

He talked off a remarkable decline in inflationary pressures and deteriorating economic prospects and culminated by stating that the Central Bank had leeway for further easing, if necessary.. it still looks as though we will see Euro interest rates 75 to€“ 100 bp lower by the spring.

Over the weekend we have seen further bail-outs, cash raising and capital increases in the Banking Sector. The most significant was the US Government ‘rescue' of Citigroup Inc, the second largest bank in the States, to the tune of $300 billion.

After last weeks continued weakening of the sector, this has come as a welcome reprieve with Banking stocks surging on the European bourses first thing. From the UK, Standard Chartered decided to raise £1.8 billion via a cash call to boost its capital base probably more to do with that they could rather than that they needed to.

Meanwhile in Ireland, the Irish Government has agreed to take part in a Euro 3 billion bail out of Bank of Ireland that will be led by private equity probably of US origin.

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UK unemployment on the rise

Headlines, reading that 4,000 UK jobs were lost yesterday, have produced a raft of new estimates as to where the total number of unemployed will get to before this recession ends.

The consensus is that we will see a total in excess of 2 million imminently but from there it is anyone's guess. If anything, it makes the employment and earnings data, scheduled to be released at 9.30am today, even more relevant than the release of the BoE Quarterly Inflation Report at 10.30am.

That's not to say that the latter won't be watched with great interest but you have to feel that the content will have been anticipated and flogged to death in the press already. Unless there is something within the report that is totally out of synch with previous comment, one must assume the composition will be of concern on growth, rapidly falling inflationary pressures and worries of an undershooting of the inflation target in 12-18 months.

The unemployment numbers are expected to show an increase in people out of work of 35,000 giving a rate of 2.9% but I would not be surprised to see a higher figure of 40,000+ and 3%.

Really, it is difficult to see what sort of figures/statement can help Sterling in the immediate term with markets likely to view anything positive as a blip in the continued descent into the mire.

There are of course other things afoot around the globe following the near Global-wide Bank holiday for Armistice / Veteran's day yesterday.

Oil remains in the headlines with the recession led lack of demand keeping downward pressure on crude prices (WTI below $60 pb again to a 21-month low)) and talk of an additional emergency OPEC meeting, to try and cut production again, ahead of the scheduled mid-December get together in Algeria.

With the continued fall in demand it is difficult to see what OPEC can do. Keep their collective fingers crossed that there is a hard Winter, weather-wise, in the West and especially the US?

Following today's UK data, attention will shift to a raft of statistics coming from the Eurozone and its participant nations. Yesterday's German ZEW data gave a mixed message but by and large the current assessment still stinks.

Today we see Industrial Production estimates for September which are expected flat on the month with the danger on the downside.

Tomorrow the ECB will publish its monthly report for November which is likely to just put in print Trichet's prepared remarks at last week's post-Council press conference but on Friday we will see the preliminary estimates for 3rd Qtr GDP. This data is critical for the Eurozone. If, as seems almost certain, GDP turns out to have contracted again, then neither the ECB or anyone else will be able to argue against the fact that Eurozone is in recession.

This in turn will increase the likelihood that the ECB will cut rates regularly for the next 6-months until market rates reach the level with core inflation of about 1.75%.

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UK interest rates cut by a third

Wise Money has sat through various BoE / MPC meeting/announcements when the Central Bank have surprised the market far more frequently on the hawkish side as it turns out but never has the market been so caught out by a UK decision.

The minutes in 2-weeks time have become more important than ever with the chance that the vote for a 150bp cut was unanimous inconceivable.

The process by which the committee came to the decision, will therefore be avidly anticipated. Last night's evaluation of the cut and its likely effect centred solely on just how much of the cut will filter through to the economy as a whole and how much would be absorbed by Banks to enhance their capital position and their bottom line.

Government pressure must be brought to bear especially as they are a major stakeholder in most of the major institutions after nationalising them.

There was very little market reaction immediately following the news as dealers, investors and the like seemed to be at a loss as to what they should do next.

The ECB weighed in with their expected 50 basis point cut bringing its rate down to 3.25% - a 75 point cut was discussed but ultimately rejected. According to ECB President Trichet euro zone inflation was expected to continue to fall back hinting strongly that another rate cut could follow as early as next month.

Reacting to the interest cuts and an IMF report released yesterday predicting that the world's developed economies were heading for their first full year contraction since the Second World War stock markets took fright and share values plummeted.

In New York the Dow Jones ended down 443 points or 4.85% following a decline of 5.7% in the FTSE 100. There were similar declines in Asian markets with the NIKKEI dropping 3.55%.

Turning our attention to today's key data all eyes will be on the US non farm payroll numbers for October due for release at 1:30pm GMT. Expectations are for a decline in jobs by some 230,000 taking the unemployment rate to 6.3% from 6.1% in September.

The effects of Hurricane Ike came too late to be fully reflected in September's figures so we could see the delayed impact of hurricane related disruption in this months figure. Not surprisingly private service sector job losses have accelerated adding to continuing reductions in manufacturing and construction jobs.

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Risk aversion prevails with less volatility

Safe haven flows driven by risk aversion again boosted the dollar and yen yesterday but market activity was less volatile than that seen last Friday.

The yen traded as low as 91.93 verses the dollar but remained above the 13 year low seen on Friday (90.95) and rose to 113.61 verses the euro its highest level since May 2002. The dollar set a fresh 2½ year high verses the euro at 1.2332.

Finance officials from the G7 earlier issued a statement saying they were concerned about the excessive volatility of the Japanese currency and said they would continue to monitor markets closely and cooperate as appropriate, raising prospects for a coordinated intervention.

Equity markets also enjoyed some rest bite from the recent turmoil. The FTSE closed just 30 points lower on the day having traded down 218 points at one point.

The Dow closed down 2.4% recovering some lost ground suffered during the day. Overnight in the Far East both the NIKKEI (up 6.4%) and the HANG SENG (up 14.3%) posted strong gains that hopefully will inspire and encourage traders in European and American markets today.

If the ECB required more evidence that a further cut in interest rates is urgently needed it came in the form of the German IFO.

The German corporate sentiment index fell in October to its lowest level since May 2003 on expectations the export sector will suffer a big hit from weakened foreign demand.

The Munich-based IFO economic research institute said that its business climate index, based on a monthly poll of around 7,000 firms, fell to 90.2 from 92.9 in September and well below the 91.0 expected. The latest German IFO and euro-zone M3 figures add further weight to the view that the ECB is set to cut interest rates aggressively.

In the US, sales of new homes increased during September by 2.7% as builders slashed prices and inventories declined. This somewhat encouraging news follows better than expected figures for existing home sales released last week.

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Equity markets support central banks

UK and European moves to restore confidence in financial markets were met with strong approval by markets yesterday as the FTSE, Dax and CAC40 all rebounded.

The US recorded is largest one day rally since the recovery following the 1929 crash while Asian shares continued the trend overnight with the Nikkei climbing a record 14.2%, and the Hang Seng up 4%.

The FTSE gained 8.3% on the back of the details that emerged of the UK government's plans to inject some £37bn that will result in a part nationalisation of some British banks.

The UK model was mirrored in the Eurozone with a number of nations announcing plans. Germany guaranteed €400bn of interbank lending and provided a €100bn fund to inject capital while France guaranteed up to €320bn of interbank lending with a further €40bn at its disposal to provide new capital. The Dax and CAC40 both ended the day over 11% higher.

The US has this morning announced that it will invest $125bn in nine major American banks as part of its $700bn plan, with Treasury Secretary Henry Paulson is due to speak later today to discuss the plans which also involve a further $125bn to recapitalise financial institutions across the US. The Dow rose 11.08% yesterday.

Three month GBP Libor set slightly lower at 6.27 and three month Dollar Libor fell 7 basis points to 4.75, in what may be signs that interbank lending markets are reacting positively to government intervention.

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Uncertainty and weak data weigh on markets

Another day of uncertainty surrounding the US government's $700 billion financial rescue plan coupled with the worsening global economy weighed on markets yesterday.

European stocks which had been in positive territory were dragged down by Wall Street stocks as investors fell prey to the concerns enveloping US markets. The FTSE100 lost ground in afternoon trading to post a 1.8% decline, the Dow and S&P500 finished 3.2% and 4% lower respectively.

It would appear that market participants are becoming cautious that even if the bailout bill is passed, it may do little to affect the rapidly weakening global outlook.

Republican leaders are currently attempting to persuade their party members to back the rescue package before it is put to vote in the House again this Friday. While the democrat party may be reluctant to take the bill before lawmakers unless they are sure of success. However, recent comments would suggest that there is more chance of the bill being passed than not.

The first data release from the US showed there was no change in the direction of US jobless claims, which increased to 497k from the previous weeks 496k. This is the highest level in seven years and offers an indication of how the financial turmoil is hitting the real economy.

Lower than expected factory orders also signalled that the US economy is grinding to a halt as businesses pullback spending. The 4% drop for August was the most in almost two years.

The European producer price index provided more evidence that inflationary pressures are easing in the euro zone. Prices rose 8.5% in August from a year earlier, compared to last months 9% increase and the monthly figure dropped 0.5%.

Data from Nationwide illustrated the largest decline in UK house prices since the survey began in 1991. The year on year number came in at -12.4% and the monthly number at -1.7%.

After the European Central Bank announced their decision yesterday to keep the benchmark rate at 4.25%, Trichet said that the financial market turmoil is dampening economic growth and inflation risks have diminished. Having taken a while, it appears that the governing council has finally changed sentiment and it could be suggested that this is a clear sign that a rate cut is in the pipeline. Possibly before year end.

Trichet's comments helped the euro to a 13 month low against the dollar, declining for a fourth consecutive day against the greenback. The pound looks to be heading for a 4 percent drop against the dollar this week. Sterling is little changed against the euro.

Crude oil continued its fall yesterday. The November Nymex futures contract has declined 13 percent so far this week and it is difficult to see any upside given the likely slowing in demand as the US flirts with recession.

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Jitters continue as House vote looms

As expected, approval was obtained from the US Senate last night for Treasury Secretary Henry Paulson to push ahead with his Troubled Asset Relief Program (TARP) .

The bill received a 74-25 vote with 40 Democrats, 33 Republicans and independent Joe Lieberman voting in favour of the plan. Backed by the Bush administration, the package now goes to the House of Representatives, which rejected Paulson's initial version of the proposal.

Once the bill had been passed, Senate Banking Committee Chairman Christopher Dodd joined the Treasury Secretary in commenting on his hopes that the vote would send a strong signal to global markets.

While the US equity indices were unable to finish in positive territory they did rebound off the lows of the sessions. The Dow ended just 20 points lower and the S&P500 posted a marginal decline of 5 points. It seems that markets are likely to remains nervous until the new House vote which is expected on Friday.

At 12:45 today we have the ECB rate announcement. As the euro-region slides towards its first recession, Trichet is finding it difficult to protect the economy from the global credit crunch but at the same time having to fight inflation.

It is predicted by all 58 economist surveyed by Bloomberg that the benchmark rate will remain unchanged today at 4.25 percent, with a cut predicted by December.

Yesterday in Europe the manufacturing PMI dropped to 45 in Sep down from 47.6 in Aug. Unemployment also rose to 7.5% in Aug being the highest level since Apr 2007. This is further support that the euro-zone is heading for a recession after the economy contracted in the second quarter of 2008.

In the UK the manufacturing PMI contracted at the fastest pace in 16 years to 41 in Sep compared to 45 in Aug, while the service industry stagnated in the 3 months up to July for the first time since 2002.

It was then the turn of the US to provide an update on the state of their manufacturing sector. The ISM factory index for Sep dropped to 43.5, the lowest level since Oct 2001. There was also the release of the ADP employment change, which showed that US workers continue to lose their jobs with an estimated 8k job cuts made in Sept.

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Hawkish ECB comments

In comments yesterday from the ECB, Webber from the governing council sounded out a hawkish tone, stating that much discussed rate cuts in the Eurozone are being expected too early.

The ECB has started to concentrate its concerns about operational issues on the collateral system: with comments again from Webber that 'The collateral that we take must also be traded in the market becasue only then is it priced accurately' . This may lead to ultimately tightening lending standards, showing unlikely good news for the economic growth in the EMU.

Further comments from the ECB vice-president Papademos also warned that further rate rises may be needed if second round effects materialised in the Eurozone. Remarks from the other ECB members, Bini Smaghi and Bonello, all suggested the central bank is attempting to temper market expectations of rate cuts ahead.

The USD was not helped yesterday by the hawkish comments yesterday from the ECB, raising the prospect of an interesting ECB policy decision next week, this continues the confusion over which path we will see currency rates take.

The broad decline in inflation and inflation expectations has lessened the need for rate hikes but this is evident in all G10 economies. With the US economy arguably in a more advanced stage of economic adjustment and with the Fed having already eased aggresively, the pressure is building on the Eurozone and other G10 economies to seek a more accomodative policy ahead.

The hawkish commentary will be increasingly unjustifiable and we see little scope for the significant yield gains in favour of the Euro.

Crude oil prices continue to edge higher, breaching $119/bbl off the back of feas over the disruptions from Tropical Storm Gustav, which is expected to strengthen into a major hurricane in the Gulf of Mexico.

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Weak IFO expected....

The Euro fell for a third day against the dollar on speculation the IFO Business Climate report will show today that confidence has slumped in Germany to a three year low.

The currency traded near a three-month low versus most major currencies and towards a six month low against the dollar with concern credit-market losses and slowing exports will stop the European Central Bank from raising interest rates this year.

The US dollar grew stronger on Monday and early Tuesday on the speculation of a weak German IFO survey, but could well decline later today with expectation of Sales of new houses in the U.S. likely to have fallen in July as mortgage lending dried up.

US homes purchases are expected to have dropped 0.9 percent to a 525,000 annual pace. Mounting losses on subprime mortgages have caused banks to withhold credit and boost borrowing costs, hurting demand even as prices are falling and making houses more affordable.

The decrease in sales has signalled the worst real-estate slump in more than quarter of a century.

The Pound fell against the dollar again on Monday, extending a fifth week of declines, the longest continued drop since February 2006. The UK Currency, slipped to its lowest level since July 2006 as effects of last weeks government report showed economic growth stagnated in the second quarter.

The report also added pressure to the Bank of England to set aside concerns about inflation and cut its benchmark interest rate, currently at 5%. With the UK inflation rate at more than twice the 2 percent target, the Bank of England have been reluctant to lower interest rates, and understandably so.

The Australian and New Zealand dollars continued their recent declines as concerns credit-market turmoil will widen prompting investors to sell higher-yielding assets funded in the Japanese currency.

The New Zealand dollar fell to its lowest level in over a week, and the Aussie dollar to a four month low against the most traded currencies on speculation that the nations bank will cut Australian interest rates from the 12-year high of 7%.

Crude oil was little changed after rising yesterday as Tropical storm Gustav formed in the Caribbean Sea, raising concerns it may disrupt production at oil fields in the gulf of Mexico.

Gustav has strengthened to near hurricane force with winds about 70 miles an hour and was moving towards the gulf. Prices also rose after Russian lawmakers voted to recognize the independence of two breakaway Georgian regions, increasing the prospect of further tensions in the area.

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