Your weekly markets round-up from Octopus
Posted on: 03 Aug 2012 by James Farmer

Equity markets were bolstered this week by fresh hopes of central bank intervention. As we discussed in our last update, European Central Bank (ECB) President Mario Draghi’s declaration that the ECB was ready to do “whatever it takes” to preserve the Euro, whetted investor appetite, helping to drive Spanish and Italian yields down and equity prices up. So, with investors expecting something big, a lot was resting on this week’s announcements from both the US Federal Reserve and the ECB.

The Fed was first to disappoint. Economists poured over the statement for news of a potential third round of quantitative easing (QE), but to no avail. Interest rates were left on hold, and with no announcement on QE3 even signalled, markets fell back accordingly. Some analysts have looked to draw comparisons between the phrasing used in this statement with others that proved to be a precursor for QE. However, this type of second guessing is really an exercise in futility. Markets will be looking to the September meeting now with eyes firmly on the data in the build up to the meeting itself. Bad news on the US economy is therefore likely to be greeted favourably by equity markets and gold. Good news will give support but not of the kind markets want to see right now: the patient wants more medicine before being pronounced better.

This week President Draghi followed last week’s strong words with further talk but still no action. It was interesting to see the European stockmarket bounce around minute by minute as each sentence left Draghi’s lips but overall the market was disappointed and equity markets dropped off. There has been plenty of precedent for markets setting themselves up for disappointment in advance of announcements from policy makers and so this can’t have been much of a surprise to many. It certainly wasn’t to us. Spanish yields once again returned to 7% and markets have given back much of the week’s gains. That said, the market is up from the point when Draghi first intervened last week, so the reaction has not been too negative. There is still a strong sense that the ECB is committed and indeed ready to act – just not yet.

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