Following a busy overnight session, which saw a surprise announcement out of the Brazilian Central Bank cutting rates more than expected, and confirmation of the deterioration in the Japanese economy where January saw a record current account deficit, today we have already seen the Bank of England proceed as expected keeping its key interest rate unchanged (at 0.50%) and QE fixed at GBP325 billion. The ECB is next with its rate announcement, expected to keep things on hold. Yet the mood of the morning is set by speculation that the Greek debt swap may see a sufficient participation rate for the PSI to go through, even if that means CAC activation, as somehow a Greek default is good, and only an "out of control" bankruptcy would be bad. That coupled with renewed expectations of more QE, sterilized or not, and hopes that tomorrow's NFP will be better than expected, as somehow the Fed will pump money even if the economy is "improving", is all that is needed to send the post-roll ES contract to session highs nearly 1% higher than yesterday's close.
Bank of America has a more detailed summary of events:
Asian equity markets ended a three-day losing streak by finishing up sharply higher after growing optimism over Greece's debt restructuring plans. In addition, the strong ADP private employment report out of the US yesterday boosted risk appetite. The best-performing market was the Japanese Nikkei, up 2.0%. Japan's equity market was also lifted by the final release of Japan's fourth quarter GDP, which showed that the economy only contracted 0.2% qoq, much less than the originally reported 0.6% contraction. The Hang Seng finished 1.3% higher, while the Shanghai Composite rose 1.1%. The Korean Kospi was lifted 0.9%, while the Indian Sensex was closed today.
In Europe, equities are enjoying a similarly strong rally due to the optimism over the Greek debt swap and EADS, the parent company of Airbus, doubling its dividend. In the aggregate, European shares are trading 1.2% higher. The French CAC is outperforming, up 1.8%, and the German DAX is 1.7% higher. Shares on London's FTSE are underperforming the broader market, up only 1.1%. At home, futures are pointing to a strong rally as well. The S&P 500 is set to open 0.8% higher.
In the bond markets, US Treasuries are higher across the curve. Both the five- and ten-year notes are 1bp higher, at 0.86% and 1.99%, respectively. The long bond is up 2bp, at 3.14%. In Europe, the UK gilt is 3bp higher, at 2.16%, and the German bund is 4bp higher, at 1.81%. Meanwhile, yields on Italian and Spanish debt continue to drop as investors regain confidence in the country's sovereign debt. The Italian 10-year yield is 15bp lower, at 4.76%, and the Spanish 10-year is 5bp lower, at 4.99%.
The dollar is weakening against a basket of other major currencies, such as the Japanese yen, euro, and British pound. The DXY index is down 0.4%. Commodities are getting a lift from the weaker dollar. WTI crude oil is 80 cents higher, at $106.95, and gold has gained $16.40 an ounce, to $1,701.60.
As was widely expected, the Bank of Korea left its key interest rate unchanged, at 3.25%. Today marks the ninth consecutive month that the Bank of Korea has left its benchmark interest rate on hold. The central bank has left rates on hold as it is very worried about the downside risks to the growth outlook caused by the general slowing in global economic demand and the sovereign debt crisis in Europe. In our view, easing inflation pressures along with the previously mentioned factors persisting for the next several months should keep the Bank of Korea on hold until the second half of the year, when we have penciled in two 25bp cuts.
Late yesterday, the Brazilian central bank cut interest rates more than expected. The market was looking for interest rates to be cut 50bp from the prior rate of 10.50%, but the central bank surprised the markets by cutting their benchmark interest rate by 75bp. Emerging market central banks across the globe have been preemptively cutting interest rates to counter slowing global economic demand, as well as the sovereign debt crisis in Europe.
Japan's economy shrunk less than originally reported in the fourth quarter. The country's economy contracted 0.2% qoq, according to the final fourth quarter report. In the prior report, it showed that the country's economy shrank 0.6%. Looking at the details of the report, we find that there were revisions across the board.
EU-harmonized consumer prices in the Netherlands rose 1.0% mom in February: slightly more than the 0.9% mom gain penciled in by the consensus. On a YoY basis, consumer prices were up 2.9%, unchanged from January. In the short term, consumer prices will likely remain sticky, as higher oil prices keep upward pressure on inflation. In the longer term, the impact of rising oil prices should fade, with the weak economic backdrop and high unemployment restraining consumer prices. For the euro area as a whole, we see consumer price inflation slowing to 1.5% by the end of this year.