The important news yesterday was ECB President Jean-Claude Trichet´s announcement that the ECB would provide unlimited loans to EMU member states until the end of Q1 2011.
This is important because it enables indebted EU nations such as Portugal and Spain to remain solvent for the moment. In the event that bond spreads in these countries continue to increase and the markets stop investing, their governments can seek alternate funds from the ECB.
However following the ECB press conference the euro did not significantly rise yesterday. In fact this morning the common currency is perched at around the same rate as 24 hours ago.
This is because though the ECB decision provides short-term relief to indebted EMU member states the announcement fell short of expectations. The markets had hoped that the ECB would announce a mass buying of Spanish and Portuguese government bonds – the ´nuclear´ option ‘ – to pre-emptively prevent the crisis spreading.
This though is beyond the ECB mandate. The bank´s regulations specifically forbid the mass buying of government bonds, and the bailouts provided to Ireland and Greece are already under investigation in a German constitutional court. If the court finds the bailout packages illegal (it is expected to report in February) the flow of funds into these indebted nations could stop.
Furthermore the German government is adamant that the ECB will not be transformed into a mechanism by which it has to shoulder the debt of impoverished EMU members. In fact there are renewed talks inside Germany that past Q1 2011 Irish and Greek debt ought be restructured to include ´bondholder haircuts.´
In short then the market reaction to the ECB conference was muted. This perhaps should have been expected: the sort of bond buying program the market hoped for would require an entirely new treaty among EMU members, and it was unlikely President Trichet would bypass the political process to calm the markets on a short term basis.
His decision does mean though that the future of the EMU remains an unanswered question. Perhaps the markets will have to wait until the close of Q1 2011 to discover the fate of the common currency.
Elsewhere there was positive news from the UK yesterday. On the back of strong manufacturing PMI figures on Wednesday, indicating growth at a 16 year high, the UK construction PMI also showed positive growth. Though the figures are not significant in themselves – construction acounts for only a fraction of British GDP – the release assures investors that the UK economic recovery is on course.
Finally attention will turn to the US this afternoon for the release of this month´s non-farm payroll figures. These indicate the number of new jobs created in the United States in the last month, and are used as an important indicator of US economic health.
Economic analysts predict that the figures will be disappointing compared to October´s 151,000 increase. However the market reaction could be determined as much by the EMU situation as the US numbers themselves. It really depends on market mood at the time.
By Peter Lavelle with foreign currency exchange specialists Pure FX.
