Hopes of recapitalization of European banks lifted sentiment, sending financial markets higher. European bourses led the gains with DAX surging +4.91%. Wall Street fluctuated in morning trading session but climbed decisively higher in the afternoon. DJIA and S&P 500 gained +1.21% and +1.79% respectively. Commodities were also boosted with WTI crude oil price soared to a 3-day high before ending the day at 79.68, up +5.30%. Gold remained supported at around 1600. The +1.58% rise signaled resilience in demand despite increase in risk appetite.
Investors reacted positively to news that EU leaders are working on a plan to recapitalize banks. The IMF stated that European finance leaders are 'all working together on a plan to bring more capital into the banking system'. The world lender also suggested to create an SPV and buy Spanish and Italian bonds. Regarding the issue, German Chancellor Angela Merkel stated that recapitalization of some European banks is 'justified' and 'Germany is prepared to move to recapitalization. We need to have criteria, and to be prepared to move a decision quickly and if we need to discuss on this at the summit then we will'.
Optimism over recapitalization overshadowed Moody's downgrade of Italy's credit rating. The agency stated that the downgrade of 3 notches to A2 with negative outlook 'reflects ongoing economic and financial risks in Italy and in the euro area. According to Moody's, 'the uncertain market environment' and 'the risk of further deterioration in investor sentiment' are constraining the country to tap public. Moreover, Italy's rating could 'transition to substantially lower rating levels' if the situation prolongs. One of the reasons that the downgrade didn't catch much attention was it had been largely anticipated. Moody's and S&P had warned in June that they might trim Italy's rating. S&P placed the country's outlook at negative watch last month, signaling there's over 30% chance that its rating will be lowered in 12-18 months.
On the data flow, ADP employment increased +91K in September, higher than consensus of +71K. ISM non-manufacturing index slipped -0.3 point to 53 last month. The outcome was inline with market expectations. The focus today is the ECB meeting which is expected to announce some easing measures. In addition to other easing measures including re-launch of the covered bond purchase program and reintroduction of the 12-month loans for the region's banks, the central bank might cut the main refinancing rate by -25 bps.