Choppy session after ECB becomes more dovish on prospects

European stock markets endured a choppy trading session today as investors battled to second guess what actions the BoE and ECB were likely to take in the ensuing months after both central banks kept their respective interest rates on hold.

BoE and ECB reaction
The Bank of England kept rates on hold for the 30th month in a row at 0.5% and kept quantitative easing at £200 billion, which was of little surprise to investors. As such the reaction to stocks was initially minimal before prices started to sell off and the pound sterling strengthened, perhaps exemplifying the small hope that may have existed for an extension to the £200 billion QE programme.

It was the ECB rate decision however that was expected to be the more volatile of the two today and that aspect at least did not disappoint. Whilst Europe’s Central Bank also kept rates on hold as expected, the proceeding press conference with President Jean Claude Trichet was from where market prices took their lead.

It was surprising to see Trichet strike a much more dovish tone than necessarily most had expected with lines such as ‘we have significantly changed our appreciation of the economic situation’ and ‘a month ago we considered risks to growth were balanced, this is not the case today.’ Investors listening to that will either think the ECB which, having hiked rates twice already in the last six months, has completely lost credibility and failed to appropriately judge the situation or that the crisis in Europe has indeed deteriorated excessively over August. It was this ensuing debate that was raging in investors’ minds for much of the rest of the session and it now would not be a surprise to see the ECB cut rates by at least 25 basis points before the end of the year.

It was in the midst of the darkly dovish tone set out by the ECB that the euro was sent to new near two-month lows against the US dollar of $1.3943. Stocks however endured some volatile price swings in the midst of both announcements though losses were limited.

The start of US trading, where the Dow Jones and S&P both saw gains, also gave European markets a fillip to push higher.  Much of the gains in Europe were focused in resource and retail stocks. Resource stocks pushed higher with the miners and oil firms tracking copper and crude oil prices higher, despite the stronger US dollar. Both the FTSE 350 mining and oil sectors posted gains of around 1% going into the close.

Retail stocks also outperformed today after a slew of positive results from Morrisons’ and Home Retail Group. Both stocks traded strongly into the close on the back of their respective earnings.

Obama’s jobs plan now the focus tonight
Eyes now turn to President Obama tonight and his proposals to kick start the US labour market at a time when US unemployment remains stubbornly above the 9% level. Naturally with President Obama seeking re-election next year, many will view tonight’s speech as a potential launching pad for his case for re-election and so this may therefore include some surprisingly positive proposals. As such, the market will likely pay close attention to what is announced.