Sentiment weakened as the ECB disappointed by failing to deliver immediate actions to resolve the sovereign crisis in the Eurozone. Financial markets dropped across the board amid concerns that debt problems in the bloc would prolong. Wall Street declined with the DJIA and the S&P 500 losing -0.71% and -0.74% respectively. The single currency also slipped. In the commodity sector, the front-month contract for WTI crude oil plunged to a 6-day low of 86.92 before settling at 87.13, down -2.00% while the equivalent Brent crude contract fluctuated above 105 but ended the day largely flat. Gold plummeted for the third consecutive day as both the Fed and the ECB stood on the sideline, reducing the yellow metal's appeal as an alternative of fiat currencies. The benchmark Comex contract slipped -1.03% during the day.
The ECB left the main refinancing rate unchanged and announced no bond purchase program. At the press conference, President Draghi reiterated his comments made last week in London that there's a need to contain risk premia in the bond yields of some countries. Although policymakers did not step up easing measures in August to boost the economy and to resolve the crisis, President Draghi stressed that bond purchases would be reactivated. Regarding this, Draghi stated that the ECB would only support countries that have requested funding from EFSF / ESM and have accepted the accompanying conditionality. This pre-requisite is inline with our forecast. Moreover, Draghi stated that bond purchases by the ECB would be under a different modality from the SMP- the purchases would be made with high transparency and would focus on the short-end of the yield curve. Draghi's reiteration that "irreversibility" of the euro meant that it was impossible to go back "to the Lire, to the Drachma" indicated his, and the ECB's, commitment to sustain the single currency.
At the BOE meeting, policymakers also decided to maintain the Bank rate unchanged at 0.5% and the asset purchase program unchanged, following a 50B pound addition to 375B pound in July. Given the dismal economic outlook of the UK, we expect more easing would follow in coming months. Yet, it would be likely that the measures would come in the form of rate cuts as the policy rate has been lowered to unprecedentedly low levels. Expansion of asset purchases would again be the most possible choice.
On the dataflow, the focus today would be on the US employment report. The number of non-farm position probably increased +100K in July from +80K in June while the jobless rate might have stayed at 8.2%. This report would be an important indicator for whether the Fed would implement QE3 in the September meeting. The ISM non-manufacturing index might have risen +0.4 points to 52.5 in July.