Wall Street advanced more than +1% as led by another strong day for European bourses with the Stoxx600 soaring +2.7%. Both the ECB and BOE announced measures to add liquidity to the market and to stimulate growth. US data showed more signs of life ahead of the non-farm payroll report. In the commodity sector, the front-month contract for Brent crude jumped to a 1-week high of 105.88 before settling at 105.73, up +2.92%, while the equivalent contract for WTI crude jumped +3.65% to close at 82.59. Gold managed to climb high despite improved market sentiment. The benchmark Comex contract added +0.71% during the day.
The ECB stated that there are 'intensified downside risks' in the economic outlook. 'Ongoing tensions in financial markets and unfavorable effects on financing conditions are likely to dampen the pace of economic growth in the euro area in the second half of this year'. Therefore, it decided to adopt some non-standard monetary measures at the October meeting. While leaving the main refinancing rate unchanged at 1.5% in October, the central bank announced a series of liquidity provision measures were announced. 2 LTROs, with maturities of 12 and 13 months, will be conducted at fixed rate full allotment tender, using the interest rate on the weekly main refinancing operations (MROs). 3-month LTROs will also be allotted on January 25, February 29, March 28, April 25, May 30 May and June 27, 2012 as fixed rate tender procedures with full allotment. The rates in these operations will be fixed at the average rate of the MROs over the life of the respective LTRO. Weekly MROs will continue for as long as necessary, and at least until July 10 2012. The special-term one-month refinancing operations will also be conducted at least until the end of 2Q12. These are also at fixed rate full allotment.
The size of the new covered bond purchase program (CBPP2) is 40B euro. The program, with capacity in the primary and secondary markets by means of direct purchases, is expected to start in November 2011 and be fully implemented by the end of October 2012. Further details on the modalities of CBPP2 will be announced on November 3, 2011.
The main change in language in the statement was removal of the reference that 'monetary policy stance remains accommodative'. The statement contained no signal about a rate cut in the coming month. However, President Trichet said that was a 'consensus' for the decisions and there had been a discussion on whether to leave interest rates unchanged or to lower it. These signaled some of the members did favor a rate cut. We retain our view that the ECB will trim the policy rate before the end of the year.
BOE's expansion of the bond purchase program by +75B pound to 275B pound surprised the market by its timing as well as its size. The market had only anticipated it to signal easing in coming months with an increase of around +50B pounds. The BOE was in a dilemma on whether to tighten or to ease as the UK's economy has been torn between dismal growth and high inflation. Reactivation of bond purchases was based on the belief that inflation will undershoot the 2% target in the medium-term due to 'the deterioration in the outlook'.
Step-up of monetary easy was accompanied by more vigorous measures to resolve the debt problems engulfing the Eurozone. While offering no further details, European Commission President Barroso confirmed that a plan to recapitalize banks was underway. German Chancellor Merkel showed supports on idea after a meeting with the IMF, the World Bank, the ECB and the OECD, stating 'the damages that arise otherwise would be much greater in scale'.
On the macro front, US' data showed more encouraging signs. Initial jobless claims rose less than expected, by +6K, to 401K in the week ended October 1, taking the 4-week moving average to 414K. ICSC reported that chain store sales soared +5.5% y/y in September accelerating from a 4.8% gain in August. The market focus is on the September employment report today. Non-farm payrolls probably increased +53K after recording a flat reading in August. The jobless rate is expected to stay at 9.1%.