The ECB left interest rates where they were and contra to the previous couple of meetings the accompanying comments from Mario Draghi could initially have been construed as a tad dovish. Mr Draghi reiterated the ECB would extend the bond purchase program post-September if he believed it was required to continue to underpin the economy. Acknowledging that economic growth had been strong, however, he also believed that some softness had entered the European economy recently. The euro did fall as the first words were spoken but then soon recovered, as overall, he offered an upbeat view of the euro area economy.
Brexit comes back to the fore as the House of Parliament debates the customs union. The Labour party are in favour of staying within the customs union. Amber Rudd made some comments that could suggest the Conservatives have not ruled the idea out completely. Without trying to make this a political commentary it is hard to see how this could benefit us. Studying the pros and cons it would appear staying in the customs union will result in being bound by Europe’s trade policies, continuing to pay in but have no input in those policies. It would also restrict our ability to negotiate with the rest of the world our own trade agreements. That can’t be a good state of affairs. Staying inside the customs union post-Brexit would surely leave the UK in a poorer position, the worst of both worlds. Just a view some may disagree with. The pound was little moved by the debate.
US Treasury yields finally broke 3% on Wednesday evening and possibly counter-intuitively this resulted in Wall Street breaking its worst losing spell in over a year as US equities ended eking out some gains. Why markets end up being so focused on big figure changes is possibly strange, as it has no real relevance. The yield fell back below 3% on Thursday as it would appear buyers came in to take advantage of the higher yield. The yield on the two-year climbed above 2.6%, that would appear better value, you may lose a bit of yield but have a far shorter maturity date. The continual rise in short-dated Treasury yields has led to the gap between two and ten years coming down below 0.4%. You can now get a better yield on 3-month treasuries than you can on 10-year German Bunds. The gap between the ten-year US treasury and the German equivalent bund remains as wide as it has been. We did wonder at the start of the week if a more hawkish Mario Draghi would create some selling pressure of European bond leading to price falls which would be the trigger for US yields to rise above 3%. As German Bund yields fell slightly post the meeting, this appears not to be the case. The price of oil has risen 15% in the past four weeks, this will have helped drive inflation expectations higher.