While you were sleeping German bunds rock

Thursday 5th July 2012

Investors were reluctant to commit fresh funds to equities before the European Central Bank announces a decision on interest rates tomorrow. However, appetite for German bunds was strong.

Most economists forecast the euro zone's central bank will ease its key rate, already at a record low 1 percent.

ECB officials will also cut the deposit rate to zero, according to a Bloomberg News survey of 22 forecasters. Twelve said the 0.25 percent deposit rate will be cut to zero, two predicted a reduction to just above zero and eight expected no change.

“It’s a bold move and will lead the ECB into uncharted territory,” Julian Callow, chief European economist at Barclays Capital in London, told Bloomberg. “With soaring unemployment and few signs of the economy recovering, some strong monetary medicine is needed. But let’s be honest, a rate cut by itself will not end the recession, we need much more for that.”

The latest data highlighted the reasons for policy makers to act soon.

Markit Economics data showed that Germany's service industries unexpectedly contracted last month, as the nation's services PMI fell to 49.9 in June from 51.8 in May. A separate report showed that a UK gauge of services activity based on a survey of purchasing managers slid to the lowest in eight months in June.

"Investors will also want to see if the ECB President [Mario Draghi] will highlight downside risks to growth and inflation, which will set the ground for more easing," Paul Robson, currency strategist at RBS, told Reuters.

Meanwhile, the Bank of England is widely expected to announce another wave of monetary easing tomorrow.

Demand for the perceived safety of German bunds remained strong, as shown in today's auction of five-year notes. Investors bid for 2.7 times the amount allotted, up from 1.56 at the prior sale on June 6, and the second highest since May 2004, according to Bloomberg. The securities were sold at an average yield of 0.52 percent, versus 0.41 percent in June.

Europe's Stoxx 600 Index ended the day little changed from the previous session, slipping less than 0.1 percent. Benchmark stock indexes in Frankfurt fell 0.2 percent, while Paris and London both declined 0.1 percent.

Wall Street was closed Wednesday for the July 4th holiday.

All eyes are on the US Labor Department's monthly jobs data due on Friday. US employers are expected to have added 90,000 new workers to their payrolls while the unemployment rate held at 8.2 percent, according to a Reuters survey of economists.

BusinessDesk.co.nz

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