The price of disappointment

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There was a weight of expectation upon the shoulders of the ECB chief yesterday and he disappointed, being long of promises of what may happen in the future, but short of the concrete action, as markets have come to expect. Spanish stocks were down by more than 5% on the lack of action and bond yields moved back above the 7% level on the 10yr.

It appears that markets have lost faith in the ECB’s ability to step up to the plate, even though they probably over-stepped the mark by thinking this was going to happen anytime soon. This perception has been enhanced by Draghi’s admission that there was one member who had reservations with the statement yesterday (the German central bank chief).

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In sum, Draghi has probably shortened the time-frame in which Spain will formally ask for a bailout because his comments from yesterday implied that the help would flow only then, and not before.

Commentary

China again stealing UK limelight.  China’s central bank doesn’t have an official schedule of meetings, but suspicions are rising that it is now following that of the BoE on the first Thursday of the month.  The previous two months have seen PBOC policy announcements on the same day as the BoE and yesterday we had various statements from China as traders wait for both the BoE and ECB decisions. The PBOC’s Q2 monetary report was released yesterday and suggests that it is still ready to ease policy if needed, as well as promote increased two-way flexibility on the exchange rate. It remains pretty bearish on the single currency, still seeing a risk of Greece exiting the euro and there are pointed remarks about Spain too. The comments gave a modest lift to the Aussie, allowing another move above the 1.05 level before the post-ECB meeting sell-off pushed it back below.

Pinning hopes on US jobs once again.  For the previous four months, the headline increase in US payrolls has fallen short of market expectations. This follows on from a similar period of positive surprises on job growth, which helped to take the unemployment rate towards the 8% far quicker than the US Federal Reserve expected. We know from recent statements that the Fed is focused on the labour market and any further signs of deterioration are likely to seal the deal with regards to delivering further policy measures at the next meeting in September. Yesterday’s ADP survey enhanced expectations of a firmer number vs. the 80k increase seen in the June numbers. The average of the past six and 12 months stands at 150k. A number around this level should provide some support to the US dollar, but note that often on payrolls releases, the initial move is not always sustained.

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