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Equities Start to Stabilize after Recent Volatility; Norges Bank Surprises Markets and Leaves Rates on Hold
Equity markets found some stability overnight after the steep declines seen yesterday. The European banking sector saw some of the biggest declines and additional selling pressure came as Australia released employment data that missed expectations but toward the end of the session prices started their reversals. In macro data, French industrial output figures missed expectations and the quarterly Inflation report in England revised growth forecasts lower. The Norges Bank surprised markets by leaving its base rate unchanged at 2.25%, and gave the argument that global uncertainties and a lack of liquidity in the asset markets would make it unnecessarily difficult to tighten monetary policy. The S & P 500 finished 4.42% lower but Asian equities are now only marginally lower. The EUR/USD is steady at 1.4120-1.4250 while the USD/JPY continues to trade heavy 76.50-77.20. Ahead today, we will see initial Jobless claims from the US but the market moving potential of the data is likely to be limited. French industrial output for June dropped -1.6% (estimates were higher at -0.6%) as manufacturing activity in the country is slowing. There had been rumors that S & P was considering a downgrade of French government debt but one company official said that the outlook in France is stable and that there is currently no expectations of a downgrade. Fitch, on the other hand, did downgrade Cyprus (to BBB) on the argument that Greek contagion effects are present. In Switzerland, the SNB made comments suggesting that they are prepared to intervene in currency markets if recent trends continue. They said that this could include an increase in bank liquidity, which would remove incentive to hold the Swiss Franc. Another possibility would be a temporary peg to the Euro. The statement does show SNB commitment to the issue but whether or not this will be enough to reverse recent trends remains to be seen. The Swiss Franc is currently trading near record highs against both the Euro and Dollar. The Inflation Report from the Bank of England was dovish compared to what was seen previously, as worries over inflation pressures took up much less of the focus. CPI forecasts are now at 2% on average over the next 2 years with interest rates at their current levels. In the accompanying statement, King echoed this sentiment, saying that growth expectations are being revised lower. He also discussed the possibility of additional government asset purchases. In Australia, the unemployment rate came in at 5.1%, which was higher than consensus estimates. The main question going forward is the extent to which this will alter the RBA policy forecasts, with markets already starting to price in lowered rates at the next RBA policy meeting. In New Zealand, we had a stronger consumer confidence report, coming in at 113.3, which is the highest it has been since the beginning of the year. The New Zealand Dollar and regional equity markets have seen some of the highest volatility levels, with the NZD falling more than 3% during the US session alone.

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