Draghi disappoints markets

On the conclusion of the European Central Bank policy meeting, its President Mario Draghi confirmed that the policy leaders did what they do best, very little, disappointing investors hoping for some form of action to be taken. Whilst leaving their interest rate at 0.75%, Draghi stated that the detail on how the ECB could intervene would be worked out over the coming weeks, but stressed the point that ailing governments needed to go to the European Financial Stability Facility (EFSF) first. He confirmed that the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the regions debt crisis, but added that Germany’s Central Bank did have reservations about the plan. The lack of action impacted on the bond markets, with Spanish and Italian 10 year bond yields climbing once again. Spain’s yield dropped from 7.3% to 6.7% and Italy’s from 6.4% to 5.9% after Draghi’s ‘ECB will do whatever it takes and it will be enough’ speech last week, but post conference, the yields jumped back up to 6.9% and 6.2% respectively, highlighting the sensitivity of investors on the situation.

In Australia, retail sales were boosted in the month of June as lower interest rates and the chillier weather encouraged consumers to spend their disposable income. The Australian Bureau of Statistics showed that retail sales rose 1% from May, ahead of expectations of a 0.6% increase. Year on year, the figure was up 5.4%, the largest annual growth for 3 years. With the RBA cutting the interest rate to 3.5% households have more funds available, encouraging them back out into the stores and should act as a spur to the nation’s economic growth. Also out yesterday, was Australia’s trade balance which surprised the market as it showed a surplus of A$9m instead of an expected A$347 million deficit as exports outpaced imports. That was a turnaround of A$322 from the month earlier. Exports were relatively unchanged at A$26.63 billion, whist Imports fell by 2% as the cost of fuel declined by 20%.

Finally in the UK, the Bank of England confirmed that it is continuing with its bond purchase program, whilst also leaving the interest rate at its record low level of 0.50%. The decision from the BoE’s Monetary Policy Committee to maintain its current program, after it increased the Quantitive Easing program by £50 billion in July to £375 billion, was widely anticipated as it monitors the impact of last months expansion.

So it was a volatile night for the currencies against the US dollar, the Euro touched 1.24 before falling nearly 3 cents to 1.2140 immediately after Draghi’s press conference. The Kiwi and Aussie followed a similar pattern as they moved to .8170 and 1.0580 before scaling back to .8090 and 1.0460 this morning. The NZDAUD however has moved slightly higher to now be sitting around .7730. The volatility could continue tonight as we have US nonfarm payrolls, where an increase of 100,000 is expected, and will be watched closely as the result may signal that the Fed will take further action and possibly even QE3 if the number disappoints.

The ECB's lack of action sees the Euro move lower