Investors wary ahead of ECB meeting

09.48 AEST, Tuesday 4 September 2012

Investors wary ahead of ECB meeting

By Ric Spooner (Chief Market Analyst, CMC Markets)

The Australian market looks set for a steady days trading as investors wait on the outcome of Thursday’s ECB meeting.

The local market’s tone today will be supported by the ongoing rally in commodities such as oil and silver in response to the prospect of further monetary easing. There has also been minor relief on the iron ore market which has shown some signs of steadying at around $90 per tonne in recent days.

However, traders are wary of committing much more to share markets prior to any announcement on the ECB’s plans to prevent a further blow out in Spanish and Italian bond yields. Based on recent reports, investors are beginning to piece together a scenario under which ECB bond purchases will be limited to shorter maturities and conditional upon countries successfully applying for assistance from the European Stability Funds. Any such arrangement could remove short term funding problems as a source of immediate concern for markets. However, the rise in Spain’s 10 year bond yield from around 6.25% back to 6.85% over the past two weeks indicates ongoing levels of uncertainty over the situation in Europe over the medium term. Markets are likely to remain cautious heading into Thursday when the ECB will meet and Spain is also due to hold a bond auction.

Today’s RBA meeting is unlikely to see any change in interest rates or in the Banks’s neutral stance on current levels. With the recent decline in the Aussie Dollar providing some relief, the Bank is likely to need more evidence of domestic weakness or disruption to international credit markets to re-establish a short term easing bias.

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