Markets reel on dovish central banks

Markets reacted strongly to dovish noises coming from the Bank of England and the European Central Bank, both of which left interest rates unchanged today.

Both the BoE and ECB voted to hold rates at 0.5%, with the former announcing that it will also keep its monetary stimulus programme at "375bn.

Mark Carney's first meeting as Governor of the Bank of England was marked by the addition of a new element of "forward guidance" into the Monetary Policy Committee's statement. Commenting on expectations in the market for rate rises as soon as 2015, Carney broke with the tradition by stating that these expectations "were unwarranted".

The governing council of the ECB soon followed step and also gave forward guidance in a way not done in the past. The governing council stated that interest rates will remain at present or lower levels for an extended period time.

Sterling weakened at least 1.2% and the euro down 0.75% against the dollar. The FTSE 100 surged by almost 3% to above the 6,400 mark and the German Dax and French Cac were both up by more than 2%.

The Markit iTraxx Europe index was trading 5bps tighter at 112bps, and Markit iTraxx Crossover 18bps tighter at 447bps, showing that credit still outperformed equities today.

ECB president Mario Draghi also tried hard to alleviate market concerns about Portugal by calling the austerity measures achieved to date "significant, remarkable, if not outstanding" and putting high praise on new finance minister Maria Luis Albuquerque.

At the same time short selling on three Portuguese stocks, Banco Comercial Portugu"s, Banco Espirito Santo, and Sonae Industria SGPS was banned by the Financial Conduct Authority in London.

The ban was most likely requested by Portuguese authorities and brings the FCA in line with the ban placed by Commissao do Mercado de Valores Mobiliarios in Lisbon.

Banco Comercial Portugu"s was trading slighter tighter at 600bps after trading at 650bps yesterday and Banco Espirito Santo also tightened slightly to 550bps after trading above 600bps earlier this week.

Portugal again widened to above 500bps in early trading this morning but tightened by 25bps to 475bps in late afternoon trading.

Further afield CDS spreads on Egypt tighten by up to a 100bps after the ousting of President Mohamed Mursi. CDS spreads on the sovereign were trading close to 800bps by late afternoon.

It's been a busy day in the markets and our friends on the other side of the pond will have a lot to catch up on when they return back to their desks following the Independence Day holiday in the US.

Frans Scheepers, CFA
Vice President
Credit Indices

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