Financial markets tumbled as worries over global economic slowdown escalated. Both the BOJ and the ECB admitted downside risks in the recovery path are high and liquidity injections are needed. Stocks slumped with DJIA plummeting -4.31% and S&P 500 losing -4.78% yesterday. Funds flew to US Treasury with the 10-year bond rallying and yield falling to around 2.40%. In the commodity sector, crude oil price slumped with the front-month contract for WTI crude falling to a 6-monht low and losing -5.77% at close while the equivalent Brent crude contract was down -5.28% during the day. Gold initially rallied to a new record high of 1684.9 but gains were erased as the US dollar strengthened. The benchmark Comex contract ended that losing -0.44%.
After the BOJ extended monetary easing by increasing the size of its asset purchase program by +10 trillion yen to 50 trillion yen, in addition to voting unanimously to leave the uncollateralized overnight call rate at 0-0.1%, the ECB voted unanimously to keep the main refinancing rate unchanged at 1.5%. However, policymakers made some special moves as the global economic outlook worsens. The central bank announced some liquidity injection measures. It will conduct full allotment of a 6-month longer-term refinancing operation (LTRO) at fixed rates (average rate of the main refinancing operations (MROs) over the life of the supplementary LTRO). The operation will be announced on August 9 with maturity on March 1, 2012. There will also be full allotment of 3-month LTROs at fixed rates. Moreover, full allotment of fixed rate MROs will be continued for 'as long as necessary' and 'at least until the end of the last maintenance period of 2011 on January 17, 2012. This procedure will also remain in use for the Eurosystem's special-term refinancing operations with a maturity of one maintenance period, e.g. 1-week and 1-month. The most important news was that President Trichet signaled the Securities Market Program (SMP) has been re-activated. ECB President Trichet said at the press conference that while the decision to resume the SMP was not unanimous, it was made with an 'overwhelming majority'. It's said that one of the dissentients was Bundesbank President Jens Weidmann. Concerning the monetary policy outlook, the ECB reiterated that it will monitor very closely all developments with respect to upside risks to price stability. This suggested no rate hike in the next meeting.
Sovereign debt crisis in the Eurozone has shown signs of worsening again. Both Italian and Spanish yield spreads widened although the latter had a successful bond auction, selling 3.311B euro of 3 and 4 year bonds. Effectiveness of the measures announced after the EU Summit 2 weeks ago was under question after EC President Jose Barroso's call for a 'rapid reassessment' and 'further improvement' in the EFSF was quickly rebuffed by Germany and Netherlands.
US economic data has been disappointing of late. Focus of the day is the July employment report. The market expects non-farm payrolls increased by +98K following a +18K rise in June. The unemployment rate probably stayed at 9.2%.