Intraday Market Thoughts

Moody's Warns on UK, ECB's LTRO Awaited

by Kyle Morrison
Dec 21, 2011 9:16

Moodys fires a warning shot at the UK ahead of the latest public finance data and Bank of England minutes, ECB 3 and 36 month LTRO awaited, Italy GDP expected to contract, Bank of Japan unchanged. Tuesday's Premium trades are up.

Markets await the announcement from the ECBs the latest long term refinancing operation (LTRO) expected to be due at around 10:00 GMT. Yesterdays sharp drop in Spanish bond yields suggests that banks are starting to buy Spanish and Italian debt again, on a short term basis taking advantage of the higher yields with a view to financing by way of the ECBs 3 month and 36 month repos and pocketing the carry. Expectations are for a take up of around 200bn-300bn.

Todays UK November public finance data is expected to jump sharply to 16.6bn from Octobers surprisingly low 3.4bn. The latest minutes are expected to reveal that the Bank while mindful of concerns about growth, are in no hurry to pre-commit to further asset purchases in the short term, a point made recently by Spencer Dale the Banks chief economist.

The level of inflation remains a concern and the likelihood of further QE remains unlikely until the bank has visibility on the January numbers for proof of a significant drop off as this years VAT rise drops out.

Italian Q3 GDP contracted by 0.2% q/q from +0.3% in Q1 and rose 0.2% y/y from a revised +0.7%/ as austerity measures deepen further.

Moodys warned yesterday on the UKs diminishing ability to withstand shocks, shifting the debate about ratings away from Frances rating and back onto the UK. The agency reaffirmed the rating however and warned that the current fiscal plan must be stuck to. Todays release of the latest Bank of England minutes and public finance data arent expected to make very positive reading.

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The Bank of Japan left interest rates unchanged this morning though it warned of the effects that the European debt crisis was having on its economy, as well as the flooding in Thailand. Slowing exports are also a worry, as the country posted its second monthly trade deficit in a row, with exports down 4.5%.

The lack of policy change could well suggest that like the Fed the Bank of Japan could well be keeping its powder dry in the event conditions deteriorate further in the space of the next few weeks, and in 2012. The recent stability in the yen has probably helped them in that regard.


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