Markets drift lower ahead of Central Bank meetings both in the UK and Europe

Oil firms exerted substantial pressure on the FTSE 100 in early trading, leading the index lower as investors wait for the Bank of England’s interest rate decision later this morning. Markets across Europe also headed south as eyes also looked towards the European Central Bank decision at 12.45pm. Finishing a busy day will be minutes from the Federal Reserve meeting out later this evening.

It is widely expected that the BoE is expected to keep interest rates at 0.5% and the asset purchase pot at £375 billion. There are, however, some expectations across trading floors that an increase in Quantitative Easing and a 25-basis-point cut in the interest rate could be on the cards for November.

On mainland Europe the ECB is in a wait and see mood. It has become extremely clear in recent days and weeks that the ECB will not launch its bond buying programme until Spain requests a formal bailout. Although the markets are certain that this will happen at some point in the near future, exactly when remains a mystery as hard to read Rajoy plays his cards very close to his chest.

It is also unlikely that the ECB will make any moves with regards to interest rate cuts as further rate cuts will not achieve that much right now. With the main lending rate or refi rate in Europe at 0.75% and the deposit rate at 0%, the rates are so low that the benefits of additional cuts would be limited and could impair the functioning of the interbank lending market. If there was to be a rate cut in Europe it would be unlikely to happen until December at the earliest, by which time the ECB would know whether Spain had requested aid and analyse the impact of the downturn.

In the previous months focus was firmly on the central banks, however, recently investors have started to look past central banks and focus again on individual governments for the next steps in the debt crisis. This is very much the case with Spain at the moment where the markets are waiting for reassurance.

Finally this evening the Federal Open Market Committee minutes are on the calendar. Investors will be keenly hoping for further insight as to what the Federal Reserve would consider ‘sustainable improvement’ in the labour market which would result in the termination of the long awaited QE3. This will be of particular interest with the back drop of non- farm payrolls scheduled for release tomorrow.

A noticeable move on the markets this morning has been made by gold ahead of all these central bank reports. Gold for December delivery has gained 0.6% in early trading as it tries to break free from its recent range, taking it to $1789.5 per ounce.

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