Markets waiting on central banks

A worse than expected leading indicator in the US knocked sentiment on Wednesday, though the markets were more concerned with crucial central bank decisions tomorrow.

The ISM non-manufacturing index fell to 54.4 in March, down from 56 in February and below consensus estimates. This follows the disappointing ISM manufacturing report on Monday.

However, credit markets have proved resilient to weak economic news since the start of the month, and that was the case again today. The Markit iTraxx Europe was 0.5bp tighter at 120.25 and the majority of its 125 constituents rallied.

It is likely that bullish sentiment is building ahead of a big day for central banks tomorrow. The Bank of Japan is expected to announce a radical shift in policy, driven by Prime Minister Shinzo Abe's directive to do "everything possible" to hit a 2% inflation target within two years.

The Bank has a number of options available, such as moving forward the start date for asset purchases; buying a wider range of assets, such as ETFs; purchasing longer-dated JGBs; and an open-ended commitment to quantitative easing.

Expectations are high for further monetary stimulus in Japan, and this has been reflected in risk assets. The Markit iTraxx Japan has comfortably outperformed the equivalent investment grade indices in Europe and the US. A looser monetary policy should benefit credit, though much has probably already been priced in.

The ECB may join the Bank of Japan in easing policy. Even if it doesn't, the market focus will be on Mario Draghi's press conference. Questions will no doubt be asked on the mechanics of the Outright Monetary Transactions programme and Emergency Liquidity Assistance post-Cyprus bailout.

Draghi was vague when quizzed last month. The markets will be looking for more clarity this time.

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