adminLONDON – Lacklustre demand for the ECB’s new ultra-cheap loans yesterday boosted bets it will have to overcome reservations about sovereign bond buying, and left markets eyeing the widening policy divergence from the United States.
The US Federal Reserve’s outlook for rising interest rates had already illustrated the diverging path from other advanced economies, pushing the dollar to a six- year high against the yen, but it was underscored even more firmly in Europe as the ECB opened its liquidity taps again.
Two-and-a-half years on from its last injection of long-term funding that pushed a trillion euros into Europe’s markets, banks this time took a much more restrained 83 billion that was well below the 133 billion traders had been expecting.
The launch of the scheme is the central plank of the ECB’s efforts to coax reluctant banks to lend more and fire up the bloc’s flagging economy. Alongside a yet-to-be-detailed asset purchase programme, it hopes to hit the one trillion mark again.
Berenberg’s chief economist Holger Schmieding called it “a disappointing result for the ECB,” and said “the low takeup …will likely strengthen the voice of those who argue that, to really make an impact, the ECB would have to buy major amounts of sovereign bonds.”
Some top ECB members have already hinted at bond buying and the euro and German bond yields nudged down and European shares climbed as bets on such a move gained traction.
With Scottish voters hitting the polls on what looked likely to be an extremely close vote on independence it also relieved some of the pressure on the FTSE in London.
France’s CAC40 and the Dax in Germany jumped 0.7 and 1 percent respectively.
While the ECB is reluctant to overstep rules that prevent it from financing governments by buying sovereign debt, it could do so to ensure inflation – currently just above zero in the euro zone — goes back to near 2 percent.
Spanish, Italian and Portuguese stocks and bonds all extended earlier gains and QE bets bubbled, while futures prices also pointed to a solid 0.4 percent rise for the S&P 500 when Wall Street opens.
The Fed had maintained language on Wednesday suggesting that rate hikes would not happen for a “considerable time,” but it also indicated its policymakers think it could raise borrowing costs faster than expected when it starts moving.
The upshot was that the euro skidded to a 14-month trough before stabilising in Europe, while gold hit an eight-month low as the dollar swept higher across the board, a move many investors have been itching to wager on all year.
“The Fed clearly signalled overnight that although it is not imminent, they are increasingly confident they will start raising rates next year,” said Lee Hardman, a strategist with Bank of Tokyo-Mitsubishi UFJ in London.
Asia’s reception had been mixed, with MSCI’s index of ex-Japan Asian shares falling to 12-week lows, on the spectre of rising US rates and slower economic growth in China, though a weak yen saw Japanese shares jump.
The dollar spent European trading almost 1.4 percent higher against the yen than 24 hours earlier, at 108.67 yen.
Future markets still lean more towards a Fed rate move in June. But whatever the timing, US rates do seem certain to be heading higher while central banks in the eurozone and Japan remain committed to super-easy monetary policy.
Bond investors reacted with more calm than those in currency markets, and nudged yields on the benchmark US 10-year note up a modest 2 basis points to 2.62 percent.
Still, a rise in two-year yields to 0.57 percent widened their premium over German debt to 63 basis points, the fattest margin since early 2007.- Reuters.
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