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Central bank aid leaves investors hungry for more

MARKET BLOG: Euro and equity markets fall as European Central Bank fails to offer up more than an interest rate cut.

Central bank aid leaves investors hungry for more
  • ECB and Chinese central bank cut rates, while Bank of England extends QE
  • Markets disappointed more wasn't done
  • Aviva announces new strategy; lists 'legitimate' shareholder concerns
  • Poor weather helps Dunelm trading; shares rise to top of FTSE 250
  • GKN soars to top of FTSE 100 on Volvo deal
  • Oil price spikes on Statoil production shutdown
  • Ireland sells €500 million three-month treasury bills

16.15: Citywire's global team has been talking to big European investors to get their take on the ECB interest rate decision (see earlier posts) and the subsequent negative market reaction. Here's a truncated version:

Michael Krautzberger, manager of the BGF Euro Bond fund:

‘You can see that equity markets have been quite disappointed with the interest rate cut as some had expected this to be at 0.5%. I do however see 0.75% as an odd number and I expect the ECB is keeping its powder dry in order to have room to reduce this further over the coming months.’

‘I think that next we can expect more of a kind of European-like QE measure.’

Mark Dowding, Bluebay's co-head of fixed income:

‘The negative market reaction reflects the thinking that policy makers have delivered all the possible good news to markets they are likely to receive until later in the summer and yet there is a sense that this is still not enough.

'In the absence of more positive developments, peripheral markets continue to look vulnerable. It seems more market stress may be needed before policy-makers taker a bigger step forward to a more unified European vision.’

Sandor Steverink, manager of the Delta Lloyd L Bond Euro B Cap fund said:

‘Draghi, it seems, has been a lot more pessimistic than we have been used to. It’s a realisation that even Germany isn’t going to have growth path of even 2% that it’s seen in the last decade.’

Tucker to face MPs on Monday

15.14: The Treasury Committee of MPs has just announced the dates for the next episode in the rate-rigging soap opera:
  • On Monday 9 July at 16.30 they will take evidence from the deputy governor of the Bank of England, Paul Tucker (pictured)
  • Executive chairman of Barclays, Marcus Agius, will appear before the Committee on the same issue at 10.00 on Tuesday 10 July
  • Further evidence sessions 'will be announced in due course'.

With the weekend to prepare hopefully we'll get a more rigorous set of questions.

Investors unfulfilled by ECB action

14.40: Investors hoping for more than a rate cut from the European Central Bank will have been left disappointed after bank president Mario Draghi said ‘we didn't discuss any other non-standard measures’.

‘Economic growth continues to remain weak with heightened uncertainty weighing on confidence,’ he said, but the situation is ‘definitely not’ as bad as in 2008. ‘We are not there at all’.

Draghi said that the decision to cut rates however had been unanimous.

The euro has dropped sharply, down 1.14% to $1.2384, after Draghi's comments

Stock markets have also broadly turned lower, having bounced after China’s rate cut. David Jones of IG Index said that the ECB press conference 'spooked' markets as investors had been hoping for more from the bank.

Britain’s FTSE 100 is flat at 5,689, while Germany’s Dax and France’s Cac are both heading down nearly 1%.

The US Dow has opened down 0.5% to 12,876. Jobless claims in the US remained high according to the four-week moving average published this afternoon. All eyes now on the US non-farm payrolls report tomorrow.

ECB cuts rates

12.50: The European Central Bank (ECB) has joined China and the UK, acting to stimulate the economy with a 25 basis point reduction to its main interest rate to 0.75%.

The bank has also lowered its deposit rate to zero from 0.25%, meaning there’s no incentive for eurozone banks to park their deposits with the bank overnight, and it has reduced the marginal lending rate to 1.5%.

Coordinated stimulus action from China, the UK and the ECB is being seen as a signal from central banks that the global economy isn't improving.  

Markets rise as Chinese central bank cuts rates

12.05: China has stolen the Bank of England's thunder, cutting interest rates just as the British bank announced an extension to its quantitative easing programme.

Full Bank of England story here.

The People's Bank of China cut its benchmark deposit rate by 25 basis points to 3% and benchmark lending rate by 31 basis points to 6%. It is reacting to a slowdown in the world's second largest economy. Analysts reckon that second-quarter GDP could come in at just 7.6%, down from 8.1% in the first and a three-year low.

The People’s Bank also lowered the ‘floor’ for bank lending, meaning banks will be able to offer loans at discounts of up to 30% below the benchmark, compared with the previous floor at 20%.

Nouriel Roubini, New York University professor, described the move as 'another sign of how worried Chinese policy makers are about slowing growth in China', in a post on Twitter.

China's central bank cut rates one month ago.

Markets around the world reacted strongly to the stimulus, with the FTSE 100 spiking at 5,726 before dropping back down a little.

The pound was trading down at $1.558 against the dollar after the Bank of England's QE extension.

Ireland sells €500 million three-month treasury bills

11.55: Ireland successfully returned to the bond market today, selling €500 million of three-month treasury bills at an average yield of 1.8%.

The sale marks the country’s return to the capital markets since it sought a €85 billion bailout from the European Union and International Monetary Fund (IMF) in November 2010.

Ireland is the only country not to have sold treasuries since its bailout as Greece continued to auction three-month bills with yields reaching 4.3% in April. The country is expected to attempt a long-term bond issue later in the year or early next year.  

Oil price spikes on Statoil production shutdown

11.30: The oil price has spiked after Statoil, the Norwegian majority state-owned oil company, said it was preparing to shut down production at its North Sea fields.

The move comes as a dispute with unions over pensions hit a deadlock after 12 days, which resulted in the oil industry announcing a ‘lockout’; workers will be literally locked out of their workplaces.

The shortfall in production will be around 1.2 million barrels of oil equivalent a day, Statoil said in statement.

Brent crude futures rose 1.8% or nearly $2 to $101.57

Ole Hanson, a commodity strategist at Saxo Bank, commented: ‘This is a dramatic escalation of the week long strike... Focus now on the Norwegian government to see whether they will intervene.’

GKN soars to top of FTSE 100 on Volvo deal

11.27: Engineer GKN (GKN.L) has shot to the top of the FTSE 100, up 25.2p, or 13.5%, to 211.8p on its £663 million cash buy-out of Volvo’s aerospace division.

Volvo’s experience in making aircraft engine turbines will boost the group’s aerospace order book, and the division is expected to contribute 37% of group profits in the coming year.     

Analysts at Oriel Securities called the deal a ‘defining moment’ for the company and reiterated their ‘buy’ on the stock with a target price of 300p.

Spain pays dearly to shift bonds

09.55: Some breaking economic news to liven up flat markets, with investors waiting for central bank stimulus decisions:

  • Spain has paid an even higher price to shift sovereign bonds at auction, paying a yield of 6.43% on benchmark 10-year bonds, compared with 6.044% last time.
  • Roger Bootle of Capital Economics has won the Wolfson Prize for his analysis of how the eurozone would be broken up – Citywire’s Caelainn Barr is interviewing him later.
  • EU productivity declined for the third month running in June, according to the Markit productivity PMI.
  • UK house prices rose 1% in June, but are down on an annual basis, Halifax says. Full story here.
  • A Reuters poll of analysts points to China's economy having expanded by 7.6% in the second quarter of the year, down from 8.1% in the first and a three-year low.
  • UK new car registrations rose for a fourth successive month with a 3.5% rise in June, according to the SMMT, ‘despite domestic and international economic concerns’ (see chart below).

Bad weather sends shoppers to Dunelm

09.07: When the weather turns bad, Brits buy cushions, curtains and other home furnishings. So the recent washout has allowed homewares retailer Dunelm (DNLM.L) to deliver a better than expected batch of numbers to the market in a trading update today.

‘Like-for-like sales growth was exceptionally strong’ in April, May and June, the company said, ‘boosted by the unusually wet weather over much of the quarter which ensured consistently strong footfall into stores,’ accounting for approximately £8 million of revenues in the quarter.

Analysts at Seymour Pierce raised their target price for the stock from 470p to 520p, praising its strong balance sheet, niche offering, and growing market share.

Shares were up 4.6% at 535p, sitting at the top of a slightly-lower FTSE 250 (-0.1% at 11,144).

The Group has 124 stores, branded Dunelm Mill, most of them out of town.

Barclays shares dip slightly after Moody's warning

08.37: Barclays (BARC.L) shares aren’t doing too badly considering Moody’s has just fired a warning shot over the bank’s financial strength.

The shares are down 0.1% at 165p after the ratings agency acted to change the standalone bank's financial strength rating (BFSR) to ‘negative’ from ‘stable’ over concerns about the resignations of Bob Diamond as chief executive and Jerry del Missier as chief operating officer at the bank.

Moody’s is worried about ‘broader pressure on the bank to shift its business model away from investment banking and reform perceived failures in its business culture’.

It is concerned about the difficulties of finding a new chief ‘who not only has a sufficient understanding of the investment banking business to run Barclays, but also has the credibility and ability to swiftly address the weaknesses that the Libor incident revealed and stakeholders' perceptions of the investment bank’.

But these concerns are mitigated to some extent by Barclays's 'broad and strong' management team, Moody’s adds.

Aviva asks investors for 'patience' in business overhaul

08.11: How will investors judge the overhaul that Aviva (AV.L) has finally announced this morning? Well, with ‘patience’, new executive chairman John McFarlane (pictured) hopes.

Of 58 businesses the global insurer and financial giant has identified 15 ‘performing’ segments, 27 that ‘require significant improvement’ and 16 that are ‘non-core’ and will be ditched.

These include its UK bulk annuities business, its South Korean arm, and small Italian partnerships.

In today's statement, McFarlane, who took over from Andrew Moss in May, said shareholders had raised ‘legitimate concerns’, including financial strength, business complexity and exposure to the eurozone.

Business Complexity- Shareholders find our business difficult to understand and feel we have expanded the international scope of our business too far.  In addition, we have not demonstrated the benefits of being a composite insurer.

Financial Strength - Shareholders believe we have weaker capital levels, higher external and internal leverage, and more volatile capital than our peers.  They are nervous we may need new equity or reduce the dividend.

Risk - Shareholders feel we are too exposed to the Eurozone and to traditional capital-intensive life products.

Strategy - We are largely developed-market orientated with few high-growth positions.  We have had too many changes of strategy which have not achieved the required traction.  In addition, we have had £1.3 billion of below-the-line restructuring charges over the past 5 years, and yet we are perceived to be bureaucratic and inefficient.

Financial Complexity- Our financial statements are cumbersome and difficult to understand.  We use too many financial metrics which are confusing.

Most of the changes announced today will take place over 12 months, the company said, though some will last to the end of 2012.

In always-choppy early trade shares are up slightly at 282p on a flat FTSE 100 (5,684).

Investors await action from ECB and Bank of England

07.49: After the Bob Diamond soap opera yesterday, today it’s the turn of Mario Draghi and his European Central Bank, as well as the Bank of England. The two are due to announce decisions on monetary policy, and both could act to stimulate the economy

The ECB is expected to opt for a rate cut, while the Bank of England could extend its quantitative easing programme by £50-75 billion. A string of data in recent days, including yesterday’s weak services PMI, have added to expectations of a move from the bank.

Today also sees the release of US ADP employment figures, before the main event on Friday when the non-farm payrolls report is released.

Overnight in Asia, markets put in a mixed performance: Japan’s Nikkei 225 was down 0.2%, Korea’s Kospi Index was flat, while Hong Kong’s Hang Seng edged 0.3% higher.

US markets were closed on Wednesday for the Independence Day holiday.

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