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Bank of England keep QE on hold

A slightly weaker dollar helped commodities today, in what appeared to be a slight stabilisation following days of falling equity markets and the euro. Having started the day in the red, European indices and the euro had made modest gains by the afternoon. German bunds also reversed two days of gains following news late yesterday that the eurozone bailout fund, the EFSF, agreed to release another tranche of funding to Greece.

In Spain, the troubled bank Bankia is to be partly nationalised or “bailed-out” by the Spanish government, who are to acquire a 45% stake via the conversion of a €4.47 billion loan into equity. Commentators suggested that support for the southern European banking system would be well received by the markets, suggesting it is a step in the right direction.

It was a busy day on the economic calendar, the most pertinent of which was an upside surprise in UK Manufacturing production, which increased 0.9% in March against expectations of 0.5%. The Bank of England also decided to keep interest rates on hold at 0.5%, and chose not to extend its quantitative easing program, which currently stands at a total of £325 billion. The anticipated cessation of this program has boosted sterling in recent months, which is within touching distance of a three and a half year high against the Euro. The pound rose even further on the news, as some economists had expected more QE to be announced given the weak 1Q GDP data and the troubled outlook for the economy. It appeared however that concerns over inflation were holding the central bank back as CPI has been above the 2% target for more than two years. Gilts, an obvious beneficiary of QE, sold off as they learned that a big buyer was, at least for now, holding fire on more purchases.

Risk assets managed to hold onto their gains into the close; the finish in positive territory a welcome sight for many in the markets. The FTSE100 finished 0.2% better off at 5541, with the German DAX up 0.6% and the major US indices somewhere between the two at the time of writing.

This was posted in Bdaily's Members' News section by James .