- ECB softer than expected and the likelihood of a rate cut has increased.
- President Obama rules out raising debt ceiling without Congress approval.
- Markets in wait-and-see mode ahead of today's important US labour market report.
The likelihood of an ECB interest rate cut has increased substantially after ECB president Mario Draghi yesterday said that an interest rate cut and possibly a negative interest rate were discussed at yesterday’s meeting, see Flash Comment ECB meeting - Rate cut discussed, 6 December. ECB also revised its growth and inflation forecast markedly lower. Despite the dovish signal from Draghi yesterday, we still expect ECB to keep rates unchanged on the back of some improvement in the economy in the coming months but admittedly it is now a very close call.
In the U.S. focus continues to be on the fiscal cliff negotiations but there has been no major breakthrough overnight. President Barack Obama stressed that he wants an agreement on the fiscal cliff to include an agreement on raising the debt limit that could be reached as soon as January or February, see New York Times In addition, a spokesperson for the White House also assured Republicans that Obama has no intention to use a clause in the U.S. constitution that could leave room for the U.S. president to raise the debt ceiling without the approval of the Congress.
The sentiment in financial markets continues to be moderately positive on the back of encouraging economic data with both factory orders in Germany and initial unemployment claims in the US beating expectations yesterday. However, overnight financial markets have largely been in wait-and-see mode ahead of today’s important labour market report in the U.S.
The U.S. stock market closed higher with S&P 500 up 0.3%. Asian stock markets are also mostly higher this morning, taking their lead mainly from the U.S. session. Nikkei and Shanghai composite are up 0.1% and 1.3% respectively.
In the bond market German bond yields declined on the back of Draghi’s soft statement but Italian and Spanish yields spreads moved higher after Berlusconi’s announcement that he will possibly withdraw his support for Prime Minister Monti. US bond yields have moved slightly higher overnight on the back of the positive sentiment in the stock market.
In the FX market EUR weakened yesterday on the back of Draghi’s dovish comments but the market has been largely range trading since the close in Europe. JPY has weakened slightly as focus continues to be on possibly more aggressive monetary easing after the election on 16 December.
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