No clear QE3 signal from Fed, markets now rumour ECB is preparing something ‘big’

Investors were expected to stay sidelined ahead of the keynote speech of Mr. Bernanke, scheduled for last Friday at 16.00 CET, but that was absolutely not the case. EUR/USD changed hands in the 1.25 area at the start of trading in Europe, but European markets were fast captured by a remarkable risk-on move. The exact reason for this move wasn’t that clear. A lot of various messages reached markets. The eco data (poor Japanese data, European labour and inflation data) could hardly be considered as risk supportive. The news flow on the EMU crisis management was also mixed, but as yield spreads to Germany narrowed (except for Spain) at that time, investors leaned towards a favourable reading of the EMU news.

Some press reports stated that the ECB would get swiping powers to monitor the EMU banking sector. French ECB member Coeure said that the ECB was preparing the possibility of intervening in the bond market, but it should be subject to ‘strict conditionality’. However, this ‘strict conditionality’ for Coeure apparently is limited to a country request for EFSF/ESM support. Only hours before, there were rumours about Buba’s Weidmann resignation, while ECB’s Asmussen pleaded for IMF involvement.

However, markets took it as an indication that the ECB is finally preparing something ‘big’. Equities found a better bid and EUR/USD started an impressive short squeeze, clearing all the intra-week resistance levels. The pair even regained the recent correction top of 1.2590 at the onset of US trading. The pair reached an intraday top at 1.2628 early in the US. Bernanke didn’t announce the imminent start of another bond purchasing programme, but he did defend past non-conventional measures, saying they were effective and helped the economy in the face of strong headwinds. He discussed costs and benefits of non-conventional policies to conclude that risks attached to these tools have not materialized and the Fed has the power to minimize these negative effects should they appear. As furthermore Bernanke stressed that the economic situation, in particular the unemployment is unsatisfactory, it logically follows that the FOMC will decide to ease policy, if things doesn’t improve rapidly and sustainably. As it was only the timing of such a move that was missed, the initial disappointment disappeared rapidly.