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BoE and ECB interest rate decisions due

12 January 2012  •  Source: Simon Denham, Capital Spreads

A little bit of strength from the US markets towards the end of their session is translating into a mildly decent start for European equity markets. China still plays a huge part in the whole game and a fall in its inflation has been seen as a good thing as it should mean some policy easing from the People’s Bank of China. There’s been a huge amount of debate about whether there’s going to be a soft or hard landing for China’s economy in 2012 but the bottom line is that their economy is already landing, but at an airport in the mountains as opposed to the lowlands of flat growth. It’s not only in the world’s interests that China continues to grow fast, but it’s in their own and you can expect their policy makers will want to keep things that way.

Onto the main topics of today and the focus of trade will be on European central banks where both the BOE and ECB announce interest rate decisions. From a market perspective the ECB meeting will be the one to watch because that’s where the real crisis is. We’ve had two cuts in interest rates from the new President which reversed the simply bonkers rate hikes in the middle of last year and the unofficial commencement of its own quantitative easing program. Expectations are for rates to remain on hold, although at some point in the first half of this year they will probably cut the rate again and the press conference that follows the decision will most likely confirm that the second round of QE will go ahead at the end of February as already announced. Apart from those main announcements people will want to see their view on the hording of ECB cash by European banks and how they might encourage them to start lending that money as opposed to depositing it with the ECB.

For the BOE’s part things are also expected to remain on hold as they attempt to understand how the restart of asset purchases is affecting UK markets. With this current round of purchases due to end next month there’s a chance further QE will be instigated in March. You can bet your bottom dollar that if growth does not contract and even surprise to the upside, which some of the PMI surveys already have indicated it might, Mervyn King will be quick to claim that it was the work of the BOE that led to the growth.

Before and after these central bank decisions there is also a little bit of other data that’s worth being aware of and that’s industrial production from the UK and EU this morning and then retail sales as well as the weekly initial jobless numbers from the US at lunchtime.

The focus won’t just be on the economic data either as Spain undertakes a bond auction today which will also be closely watched to see how much yield investors will demand from them to buy their debt this time round.

The open of the FTSE has taken a little turn for the worse as we were calling the index to open higher by some 10 points but we have commenced the session 10 points in the red. The 5700/20 level remains the major near term hurdle for the index and if the bulls can get us above here, the next resistance is seen at last October’s highs around the 5770 area.

The euro’s down trend remains in place and at the time of writing EUR/USD is at 1.2700. This is where the action in FX markets could be today with the ECB rate decision and subsequent press conference. If Mario Draghi is seen as being particularly bearish in his view of the eurozone and let’s face it, it’s hard not to be, then this could put further downward pressure on the single currency. But even if the euro does continue to weaken, there’s nothing he’ll need or even want to do about it and the Germans in particular will be delighted to see it weaken further.

Gold continues its grind higher as the precious metal has made its way back to 1645 which is where it currently sits at the time of writing. Bullish sentiment towards the yellow brick has really built up in recent days and clients remain heavily long gold, no doubt hoping that this grind higher will continue to test all time highs, although this is some way off.

Brent continues to be propped up by the geopolitical tensions in the Middle East with the price above 113 this morning at 113.20.