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Financial Times features Stephen Pope & Spotlight Ideas

Friday July 5th 2013


Thursday 19.15 BST. Equity indices leapt and sterling and the euro sank after the Bank of England and the European Central Bank caught the markets off guard with extremely dovish policy comments aimed at countering rises in market interest rates.

The BoE broke with tradition at Mark Carney’s first meeting as governor by issuing a statement after leaving policy unchanged. It said recent market expectations of UK interest rate rises in 2015 were “unwarranted”.

“Mr Carney immediately made his ‘mark’ as he stamped his authority on the monetary policy committee through the first evidence of ‘forward intent’ if not full ‘forward guidance’,” said Stephen Pope at Spotlight Ideas.

And within two hours, in an even more dramatic move, ECB president Mario Draghi took the unprecedented step of embracing a “forward guidance” style of communication aimed at steering the markets’ expectations for policy.

Not only did he pledge that rates would remain low for an “extended period”; he also said there had been an “extensive discussion” among ECB governing council members about a possible cut.

“What was expected to be a rather dull meeting turned out to be historical,” said Carsten Brzeski, economist at ING.

“With forward guidance for the first time ever and further rate cuts in sight, the ECB tries ‘whatever-it-takes’ to safeguard the fragile recovery of the eurozone.”

Nick Kounis, head of macro research at ABN Amro, said: “Recent central bank communication has had the look and feel of a globally co-ordinated action to pour cold water over financial market expectations of early rises in short-term interest rates.”

Analysts said the central bank announcements had been aimed at countering concerns about the Federal Reserve scaling back its stimulus measures.

“The question is whether forward guidance will be sufficient to prevent UK and eurozone assets from being swept along with the tide as the Fed likely tapers quantitative easing as early as this September,” said Divyang Shah, global strategist at IFR Markets.

“The Fed can lend a helping hand by improving its own communication.”

The impact of the central bank announcements on equity and currency markets was swift and sharp.

The pan-European FTSE Eurofirst 300 equity index rose 2.4 per cent, its biggest one-day rise in 10 weeks, while the more internationally focused UK FTSE 100 ended more than 3 per cent higher.

Sterling, meanwhile, fell 1.4 per cent against the dollar and the euro briefly fell below $1.29 to its lowest level since May. The moves helped push the US currencyup 0.6 per cent against a weighted basket of its counterparts.

However, both UK and German government bonds pared early gains – at the 10-year point of the curve at least.

But Portugal’s 10-year sovereign yield fell as fears of a collapse of the country’s coalition government appeared to ease, soothing concerns about a rekindling of the eurozone debt crisis.

Furthermore, worries over Egypt, which on Wednesday had unsettled global markets and helped push up oil prices, also appeared to calm.

Egypt’s benchmark stock index jumped 7.3 per cent, while Brent crude slipped 29 cents to $105.47 a barrel.

Elsewhere in the commoditiescomplex, copper fell 0.6 per cent in London to $6,950 a tonne while goldslipped $3 to $1,248 an ounce as both metals were hurt by the stronger dollar.

The focus will shift firmly to Friday’s US non-farm payrolls report, which might provide a fresh steer to the market’s view on when the Fed might start to taper its monthly asset purchases.

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