By Gaurav Kashyap, Head of DGCX desk at Alpari ME DMCC
Equities, currency and commodity markets shed all their gains to approach pre-EU summit levels as the US Dollar index roared past 83 levels and approached those June highs of 83.50.
Following all the optimism from last week's EU Summit, all attention turned to the rate decisions of four key central banks and their views on the global economic recovery. Early in the week, the Reserve Bank of Australia (RBA) sprung no surprises and held rates unchanged at 3.50% and as the US celebrated their independence with an impressive show of fireworks from coast to coast, it was the actions on Thursday which led to extended fireworks in the financial markets.
The Bank of England (BOE) held rates unchanged at 0.50% and increased the asset purchase target by £50 billion to a revised £375 billion. The moves were expected, and are in an effort to prop up a stumbling UK economy which is threatened by recession. With inflation easing on the back of falling oil prices, weakening output data from the UK forced the MPC to act. Simultaneous to the BOE decision, the People's Bank of China (PBoC) delivered a surprise 31 basis point cut to their one year benchmark lending rate to 6.00% and cut their deposit rate by 25 basis points to a revised 3.00%.
Similar to the BOE's actions, the PBoC are desperate to stabilize future growth prospects in the world's second largest economy. The unanticipated cut was the second such cut by the PBoC this year and was reminiscent of their actions last month when they delivered a surprise rate cut at the same time the BoE announced one month ago. The timing of the PBoC's announcement is suspicious to say the least considering the slew of economic data releasing from China next week.
Inflation data, trade data, industrial production and GDP data are all on tap for release in the week ahead and the premeditated, surprise cut seems like China is bracing itself and warning global markets for more slowdowns in their key releases in the week ahead. Unlike last month, markets viewed the surprise Chinese move with great optimism - commodity markets and higher yielding assets got a boost following that announcement. However this month, markets took the news with a big dose of skepticism, voiding the markets of risk appetite and taking Gold and Crude below 1600 levels and 86 levels respectively.
Amidst the risk off environment created by the PBoC, Draghi announced rate cuts for the Euro-zone which failed to impress markets and improve risk appetite. As largely anticipated, the ECB delivered a 25 basis point rate cut to the main refinancing rate, bringing to down to a record low 0.75% and also lowered the deposit rate to 0.00%.
More surprisingly, the ECB also cut the deposit rate to 0.00% which will see no interest paid on overnight deposits with the bank in effort to get some of that €800 billion out of ECB coffers and into the stumbling Euro-zone economy. In his press conference following the announcement, the ECB President dampening sentiment and painted a bleak picture for the Euro-zone saying that "downside risks to the euro-area economic outlook have materialized" and that "economic growth in the euro area continues to remain weak with heightened uncertainty weighing on both confidence and sentiment." The bearish overtones extended the risk off mood and the Euro fell to a one month low against the Greenback.
As if there weren't enough fireworks on Wednesday & Thursday, markets had Friday's US Nonfarm payrolls to deal with.