This isn’t what was meant to happen. The euro is falling sharply today. Equities are also down and credit spreads have widened since the weekend. Peripheral debt is falling in value, so yields are rising (see four charts, below).

These are classic stress reactions in the markets… which the Irish bail-out was meant to stop, if not reverse. The worry is that politicians will continue to look for – and find – problems in domestic economies. (Portugal is lined up next, and then Spain.) The lack of reaction to Ireland’s bail-out tells us very clearly to look for a Europe-wide problem and a Europe-wide solution. Read more

Robin Harding

Here at the Boston Fed’s conference on monetary policy in a low inflation environment there was some head-scratching over lunch at the market’s muted reaction to Fed chairman Ben Bernanke’s speech.

Let’s recap. Mr Bernanke said:

  1. That inflation is 1 per cent but the Fed thinks it should be 2 per cent;
  2. That despite a 9.6 per cent unemployment rate, growth next year is unlikely to be much above its longer-term trend;
  3. That the bulk of unemployment is due to lack of demand and hence potentially addressable through monetary policy;
  4. That “there would appear–all else being equal–to be a case for further action”

Fed-speak does not come much more dovish than that. It really doesn’t. Read more

A sharp decrease in market functioning is noted by the Bank of England in its latest Financial Stability Report.

US government bonds were the only primary market — out of 15 — described as ‘functioning’ in May; eight were described as impaired. The month before, eight were functioning and two were impaired. Highly recommend a closer inspection of the table to the right – though even at a distance, you get the idea.

Commercial property is the biggest headache globally. Indeed, the housing market as a whole makes an appearance in two of the six key risks noted by the Bank:

  1. Exposure to european sovereign debt;
  2. A sustained reversal in investor risk appetite;
  3. Investors divesting Europe, buying Asia;
  4. Defaulting borrowers, esp. commercial property;

 Read more

US traders get more excited about the Fed’s decisions than their European counterparts do about those of the ECB, and no-one knows why.

This from a research paper by Magnus Andersson at the ECB. The research finds, perhaps unsurprisingly, “intraday US and euro-area stock and bond market volatility strongly increases at the time of the release of monetary policy decisions”. But more so in the US than in Europe. Why?

Tentative explanations from the author include the difference in information released, the differing mandates of the two central banks, and timing uncertainty in the Fed’s releases. However, overall, “the observed discrepancy between asset-price reactions in the United States and in the euro area following monetary policy decisions still remains a puzzle.”

What else does this gem of a paper contain? Three conclusions: Read more