Markets were boosted by comments from the ECB.Its president, Mario Draghi, said it would do whatever was needed to preserve the EUR, fuelling speculation the ESM will get a banking license or the ECB's bond buying program (SMP) will be restarted. Eurozone peripheral bond yields plunged on the news, Spain's 10yr falling 45bp to 6.93%, and Italy's 10yr falling 39bp to 6.06%. European equities closed 4.3% higher, while the S&P500 is currently up 1.5%. Commodities reacted less impressively, oil up 1.0% and copper up 0.4%. US 10yr treasury yields are 3bp higher at 1.43%. A 7yr auction saw average demand but did set a record auction low of 0.954%.
The US dollar index (DXY) fell by around 1.3% following the ECB comments. EUR rose from 1.2120 to 1.2330 and then stabilised around 1.2285 in NY. USD/JPY remained rangebound between 78.05 and 78.30. AUD was sitting around 1.0320 before the Draghi comments, surging to a NY peak of 1.0423 in response. NZD similarly rose from 0.7905 to 0.8030, outperforming the AUD following an RBNZ statement which was less dovish than expected. Long AUD/NZD positions were accordingly unwound, pushing the cross down from 1.3050 to 1.2960.
Economic wrap
US pending home sales fall 1.4% in June. Not as weak as new home sales yesterday but the downward revisions and decline in June pending sales add to the weaker tone of housing data of late after a string of mostly positive outcomes over the first half of the year. US durable goods orders rose 1.6% in June, supported by aircraft orders but ex transport orders were down 1.1% and core capital goods orders down 1.4% in June, their 3rd fall in 4 months. In quarterly annualised terms core orders were down 3.1% in Q2 vs a rise of 0.4% in Q1. Shipments of same were not weak though, the pace moderating slightly from 5.6% to 5.2% in Q2. US initial jobless claims down 35k to 353k in week ended 21/7. Claims always swing wildly in July, of no use as guide to jobs market until early-mid August, due to seasonal adjustment issues related to the weeks when auto factories are shut down for new model retooling. US Kansas City Fed index rose from 3 to 5 in June, recovering some of June's 6 pt loss.
Euroland M3 money supply growth edges up to 3.2% yr in Jun. But lending to the private non-bank sector slowed further to –0.2% yr in June.
German consumer confidence edged up from 5.8 to 5.9 in the Aug GfK survey conducted in early July.
Draghi and the ECB to the rescue? Speaking in London the ECB chief Mario Draghi said the ECB was 'ready to do whatever it takes' to save the euro... 'believe me, it will be enough'. The ECB would be acting within its mandate if high sovereign bond yields impaired the monetary policy transmission mechanism, he said. At face value, coming a day after pro QE/ESM bank Nowotny's comments, this could be an early hint that the ECB might use its balance sheet to restore calm to sovereign bond markets. It may or may not be significant that German Chancellor Merkel went on holiday today and Draghi was not in the eurozone at the time he made the comments. But it was only 2 months ago that Draghi said almost the opposite... From May 16: While the bank's 'strong preference' is that Greece stays in the euro area, 'the ECB will continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet.' Since the euro's founding treaty does not envisage a member state leaving the monetary union, 'this is not a matter for the Governing Council to decide,' Draghi said. So the stakes are higher now that it is not just Greece in the firing line, it seems.
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