Further easing no longer a foregone conclusion

Today’s Daily Wrap provides an update on:

• Minutes from Bank of England meeting suggest further QE is unlikely in November;
• Stocks higher following Moody’s decision to leave Spanish debt above junk;
• Housing data improves in the US;
• Corporate earnings mixed, banks continue to beat expectations;
• Dollar continues to drop as risk appetite remains high.

Minutes from the previous MPC meeting in the UK raised doubts over whether we’ll get further QE in November.

The minutes from October’s meeting showed the voting was unanimous on keeping both the interest rate and asset purchases the same at 0.5% and £375 billion, respectively. They also showed that there are some members who are against further asset purchases at the moment, while others raised concerns over the impact they could have in the near future.

This would suggest we’ll see no more QE at the November meeting despite inflation falling to its lowest level in almost three years. On top of this, the country is only expected to have returned to growth in the third quarter after being in recession for the three previous quarters.

There is a real concern that pulling the plug this early could quickly send the country back into recession. The central bank should follow the lead of the Fed and continue with monetary easing until the country has seen a sustained recovery, at least while inflation remains low.

Stocks and other risk assets traded higher today after Moody’s announced that they would not be downgrading Spain, leaving their current rating at Baa3, one notch above junk status. This is now in line with S&P who downgraded Spain last week to BBB-. Moody’s decision was very well received in the markets, seeing the IBEX trade more than 2% higher.

Moody’s claimed moves by Spain to combat their huge deficit combined with the ECB’s bond buying program ensured Madrid still has access to the credit markets, which helped them maintain their investment grade rating.

What this suggests to the markets is that we may have seen the last full sovereign bailout and therefore last Greek-type austerity measures that have brought the eurozone to its knees. The conditions linked to a bailout which includes the purchasing of sovereign debt are likely to be less severe than the alternative and most countries are already well on their way to bringing their budgets under control under the fiscal pact.

We had some more positive housing data out of the US this afternoon. There were 0.89 million new building permits issues in September, the largest amount since July 2008. Meanwhile, the number of housing starts also rose last month to 0.87 million, well above expectations and the highest figure since August 2008. Both of these are a very positive sign that the housing market is picking up in the US.

Corporate earnings were mixed today in the US. Banks continued to beat earnings expectations this morning, although Bank of America and Bank of New York both reported lower revenues than the same quarter a year earlier.

It was a disappointing day for technology firms after Intel gave a weaker outlook for fourth quarter revenue, while IBM’s revenue in the third quarter missed expectations. IBM traded lower by more than 4% after the open in the US, while Intel trailed slightly behind, falling by 2.5%. Technology stocks were lower by 3.47% as a whole in the Dow as the US headed into the afternoon session.

The euro traded higher against the dollar today. The pair broke above the neckline of the double bottom formation yesterday, prompting a significant move higher today. The pair found resistance around 1.3130 though, before falling slightly. If the single currency moves above here, it is likely to find further resistance around 1.316 from the descending trend line dating back to May last year.

Sterling traded higher in the cable charts this afternoon after the MPC minutes suggested we won’t see further QE next month. The pound reached highs of 1.618 late in the European session before finding resistance.  If it continues to move higher today, we should see it find further resistance around 1.62 as it target 1.627, where the pair has failed to close above this year.

Author: Craig Erlam

Tagged Corporate Earnings, EUR/USD, GBP/USD, Moody's, QE, S&P, Spain, UK, US