Financial Markets Soared after ECB Announced Unlimited Bond Purchases

By Roger Baettig | September 07 2012 3:44 AM

Financial markets responded positively to ECB's announcement on the new bond purchase program. Although much of the detail had been leaked before the meeting, investors were pleased that the central bank confirmed the action. Meanwhile, encouraging US payroll data also lifted market sentiment. Wall Street gained with the DJIA and the S&P 500 Indices adding +1.87% and +2.04% respectively. In the commodity sector, crude oil prices initially rallied amid "good news" from the Eurozone and the US, gains were pared later in the day. Gold surged to a 6-month high of 1716.9 before settling at 1705.6, up +0.68%. Price was sold down in Asian session today on profit-taking.

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The ECB announced in the September meeting that the main refinancing rate would be kept unchanged at 0.75%. More importantly, President Draghi introducted, despite objection by a member, the new bond purchase program (Outright Monetary Transactions, or OMTs), believing that it would help "address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro". Inline with what he told the European Parliament, bond purchases will be on the short end of the curve with maturities of 1 to 3 years and these are in compliance with the mandate as they are allowed to intervene in secondary market. Purchases would be of unlimited quantity and would be sterilized. Moreover, The ECB is pari passu, meaning no seniority is granted to the ECB over private investors. However, this is only for the OMT as the central bank's seniority status will be maintained in the SMP (which would be terminated as the OMT begins operation). There is no target or caps for yields. Moreover, countries sought financial assistance from the OMT must be reviewed consistently by the EU/ECB/IMF troika. The ECB revised lower its economic projection, cutting the growth forecasts for this year to a range of -0.6 to -0.2% (from -0.5% to 0.3%) with risks to growth on the downside. The inflation outlook was, however, raised to a range of 2.4% to 2.6% (from 2.3% to 2.5%) with broadly balanced risks. Growth in 2013 would be within a range of -0.4% and 1.4% (from 0 to 2.0%) while inflation during the year would be from 1.3 to 2.5% (from 1 to 2.2%).

In the US, the ADP reported that employment rose +201K in August, up from an addition of +173K a month ago. The market had anticipated that only +140K payrolls were added. Initial jobless claims fell 365K in the week ended September 1, down from 377K a week ago. The 4-week moving average stayed unchanged at 371K. The US non-farm payrolls probably added +127K in August, down from a 163K gain in the prior month.

Concerning US oil inventory, total crude oil and petroleum products stocks plunged -9.61 mmb to 1091.78 mmb in the week ended August 31. Crude stockpile decreased -7.43 mmb to 357.10 mmb as stockpiles fell 4 out of 5 PADDs. Cushing stock climbed up +0.09 mmb to 44.92 mmb. Utilization rate declined -5.1% at 86.1%.

Gasoline inventory slipped -2.33 mmb to 198.89 mmb as demand gained +1.25% to 9.18M bpd. Production rose +1.01% to 9.28M bpd while imports added +39.71% to 0.96M bpd. Distillate inventory rose +0.99 mmb to 127.08 mmb as demand slipped -9.60% to 3.22M bpd. Imports added +0.75% to 0.14M bpd while production dipped -6.99% to 4.34M bpd during the week.

Weekly change in inventory as of 31/08/12
Actual
Change
Consensus
Previous

Crude oil
357.10 mmb
-7.43 mmb
-4.95 mmb
+3.78 mmb

Gasoline
198.89 mmb
-2.33 mmb
-3.00 mmb
-1.51 mmb

Distillate
127.08 mmb
+0.99 mmb
-1.55 mmb
+0.87 mmb

Comparison between API and EIA reports:

API (Aug 31)

EIA (Aug 31)

Actual
Inventory
Previous

Forecast (using API's inventory level)
Inventory

Crude oil
-7.21 mmb
359.31 mmb
+5.46 mmb

-5.22 mmb
359 mmb

Gasoline
-2.28 mmb
201.84 mmb
-2.40 mmb