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UK Inflation Data Remains Elevated at 4.5%;Speculation of Potential Greek Default Continues The wild market volatility continues as markets gauge the appropriate level for risk sentiment and equity markets remain heavy. Stocks are not seeing the same levels as yesterday but futures are still negative in the generally cautious environment. The EUR/USD is seeing some bounce at 1.3650-1.3690 and the USD/JPY remains in familiar territory at 77.40-76.90. Macro data yesterday came in the form of UK inflation numbers, which matched the consensus estimates (remaining at historically elevated levels). CPI at these levels will make it difficulty for the MPC to make additional asset purchases, but this could still occur if growth data continues to disappoint (which would probably create downside pressure in consumer prices). In Australia, the business confidence survey dropped to its lowest level since the end of the credit crisis and in New Zealand manufacturing sales also came in lower than estimates. Since the end of last week, speculation that we will see a Greek default has increased and this in addition to the weakening macro data and the inability of Eurozone governments to reach specific bailout agreements suggests that there is little reason to believe the recent weakness in equities will see a reversal any time soon. One potential catalyst could be improvement in the US labor market but stalemates in passing congressional legislation make this a distant possibility for the near term. One bright point was seen in a Financial Times article which suggested that Italy is in the process of solidifying a deal with China to purchase treasuries and create some stability for the European banking sector. The market appears to be skeptical, however, as the latest 5-year bond auction in Italy did not generate much interest. The ECB President (Trichet) reiterated what was said at the last policy meeting, saying that central banks must prepare to provide to banks so that credit freezes do not lead to high levels of market volatility. The UK CPI for the month of August was the main macro driver on the day, matching the consensus +0.6% and +4.5% for the monthly and yearly figures. Some analysts are suggesting that the data is unlikely to change the bias of the MPC, which will probably just remain data-dependent before taking any additional measures to make policy more accommodative. Markets are currently expecting inflation levels to top-out at this level and start to decline from November of this year.
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The wild market volatility continues as markets gauge the appropriate level for risk sentiment and equity markets remain heavy. Stocks are n...