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03 February 2011

Euro Plunges After ECB Claims Inflation is in Check

Written by dslmpartners
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Global equity markets, like currencies, are holding narrow ranges, while investors remain anxious after the tensions in Egypt have yet to abate. Many Asian markets are closed for the Lunar New Year celebration, but the markets that were open posted positive gains with the MSCI Asia Pacific up 0.1%. Japanese stocks, meanwhile, fell for the first time in three days after some company’s earnings missed expectations. European shares are also mixed. The FTSE and the CAC were lower and the DAX edged higher. Commodity prices continue their ascent, driven by a combination of supply side shocks and global recovery with copper prices reaching $10,000 a metric ton for the time. US markets edged higher ahead of the US employment report.

Global bond markets continued their downward trend this morning on the back of solid economic data. Eurozone spreads have come in sharply in recent days on hopes of a deal on a rescue package for the periphery at tomorrow’s summit. In Spain, though, borrowing costs declined as Spain sold €1.89bln of 2013 bonds with a coupon of 2.5% at an average yield of 3.254%, down from 3.717% at the December auction so overall demand weakened but more importantly yields were lower.

The January service PMI rose to 55.9 from 55.2 of the flash reading and 54.2 in December. Coupled with the strength of the manufacturing PMI earlier in the week, a broadening of the euro zone recovery would seem to be confirmed. However, the fact that December retail sales so badly disappointed (-0.6% vs consensus of +0.5%) warns of the continued sluggishness of domestic demand.

After their Interest Rate Decision, the ECB had a press conference in which Trichet underplayed the higher than expected food and energy inflation in the EU. The remarks, sent yields on short term German and Euro interest rates lower, which dragged the Euro currency lower against most major currency pairs. The EUR/USD fell nearly 2 big figures to close the trading day at 1.3620.