ECB, Inflation and US Markets
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ECB, Inflation and US Markets

ECB, Inflation and US Markets


Trading Features / Strategies from Simon Denham of Capital Spreads.

So the ECB has set the cat amongst the pigeons being the first of the major blocs to indicate that, far from wishing to protect growth with rate cuts, they are more inclined to fight inflation. Jean Claude Trichet’s hawkish comments yesterday afternoon sent the Euro into a frenzy with a 200 pip move versus the dollar as traders bought into the higher yield story.

Until Mr Trichet’s statement the markets had been quite somnolent over both the Bank of England and ECB rate announcements (unchanged as expected) with the general trend actually towards a fading Euro. His effective guarantee of a rate hike in July was truly a surprise and flies in the face of more recent central bank policy of trying to float intentions via less outright methods. What the weaker economies in the Euro bloc must be thinking at the moment is probably unprintable as the ECB once again focuses solely on events in France and Germany and ignores the struggling satellite nations. Italy, Spain, Portugal, Ireland and Greece (the unflatteringly named PIIGS) are seriously struggling with massive economic problems which are not being helped by either the strong currency or the high interest rates. Mr Berlusconi in particular, never a fan of the EC experiment, must be seriously tempted to publicly voice disapproval with ECB policy and to once again shake the weapon of disengagement from the whole project.

Of course the mechanics of such a desperate measure are difficult to contemplate and therefore any threat along these lines will probably be pretty much ignored as being practicably unworkable. Can you imagine the effort required in turning all bank accounts back into Lire, recalling Euro notes to issue less valuable local currency etc). But, below the surface, there is plenty of dissatisfaction with the way that the central banks seem to concentrate on the major bloc partners. If this is truly building into the worst economic crisis since the nineteen thirties (an oft mentioned comparison that, frankly, seems very unlikely) then the stresses on the Euroland financial system are going to get a lot worse.


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In the ECB’s defence they are, like the BOE, solely charged with an inflation fighting mandate and the Germans, of course, have historical experience of a Hyperinflation disaster. Unfortunately for policy makers the independence of the central bank is now working to undermine the whole stability of the Union itself.

US Markets

Yesterday Equity markets made one of those strange shifts in mood that make calling sentiment so difficult. For the last few months a rising crude oil price has generally been market negative but last night the US bought into the oil story big time. The biggest upwards one day move in history. Whilst at the same time the Dow Jones and S&P shot higher as traders decided that the recent weakness in the financial sector had been overdone.

Bank Dividends

The buying of bank stock is understandable as most financials seem to be writing in worst possible scenarios as though they have actually happened. Yes, revenues are not likely to be as good as recent years but yields on many stocks are now so generous that even a halving of dividends would still leave a reasonable return.

The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.


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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.

Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'ECB, Inflation and US Markets' edited by SD, updated 06-Jun-08



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