Markets lift higher on central bank outlook

Thursday, February 06, 2014

As expected both the Bank of England and European Central Bank opted to leave their respective base rates unchanged today, prompting little reaction from investors. Despite the UK economy showing a surprise improvement towards the end of last year, BoE governor Mark Carney has explicitly stated that the central bank is in no hurry to increase interest rates. Forward guidance received in August last year stating that the BoE would not consider a rates rise until unemployment had fallen to 7% was largely downplayed by policy makers and as a result investors will subsequently look towards next Wednesday’s inflation report for further guidance.  

The ECB also chose to hold interest rates at historically low levels for the fourth consecutive month but comments from President Mario Draghi reaffirmed their commitment to take action if necessary as emerging market contagion and deflation remained a real threat to eurozone stability. The sharp drop in eurozone inflation in January to 0.7%, significantly below the 2% target rate, has worried policymakers. With concerns of slowing Chinese and US growth owing to weaker PMI readings in January, market participants may hold off from committing to significant positions until economic forecasts and analysis from the central bank in early March.

European equity markets built on early gains, rallying off the recent multi-month lows as London’s blue chip index looked set to close 1.5% higher and both the DAX and CAC rallied higher for the third consecutive session, set to close 1.5% and 1.9% respectively. Stocks in the US opened slightly higher on better than expected initial jobless claims which declined 20,000 w/w to 331K. At the time of writing both the S&P 500 and DJIA were both trading 1% higher. 

More from: Kash Kamal