ECB in a bind

A sell-off in equity markets yesterday, led by a sharp decline in European bank stocks, spilt over into both foreign exchange and bond markets. In the former, the euro traded down to just shy of  $1.05 against the dollar and to almost 87p against sterling, but it has since recovered to over $1.06 and close to 88p respectively after the Swiss central bank (SNB) announced that it would provide liquidity support to Credit Suisse, the bank in the eye of the current storm.

In government bond markets, German 2-year yields fell by around 50bps to 2.35% and US 2-year yields closed about 35bps lower at 3.90%, though both have popped higher this morning following the SNB announcement

Ahead of its interest rate decision later today, the ECB is caught between a rock (record-high core inflation in the Euro area) and a hard place (heightened financial market volatility). As of this morning,  the market is attaching about a 70% chance to a 50bps rate hike today, the move the ECB said back in February it “intended” to make at this meeting

In the UK, the Chancellor, Jeremy Hunt, delivered his spring Budget yesterday and noted that the near-term economic and fiscal outlook has improved somewhat – with the economy now seen avoiding a ‘technical recession’ this year and the fiscal deficit expected to be lower than previously feared (the sharp drop in energy prices is a key driver of this improved outlook)

Economic data due today include jobless claims and housing starts & building permits in the US