Home > Uncategorized > 2012/02/09: Quick Post: Bank of England ups Asset Purchase… hits Gilts

2012/02/09: Quick Post: Bank of England ups Asset Purchase… hits Gilts

© 2012 ROHR International, Inc. All International rights reserved.

When is a support a burden? When it has a split inference. At least that seems to be the nature of these various asset support and quantitative easing programs. The Bank of England gets approval for an additional £50 billion of firing power for its Asset Purchase Programme, and what do the Gilts do? Immediately sell off.

And yet, that is not so startling as it might seem. The Fed alluding to its intention to proceed with QE2 in August 2010 also brought immediate pressure on both the Gilt and Bund; and ultimately led to significant weakness in US govvies once the program started in November 2010. It’s about inflation expectations.

The nervousness of the primary government bond markets is reasonable in the context of the degree to which these various extended asset purchase programs are intended to also support prices. And while that shows up in the equities to some degree, the main beneficiaries tend to be the risk assets such as metals and commodities.

In fact, the word from both the Bank of England and the US Federal Reserve over the past week has been that they are dedicated to not letting inflation fall below 2.0%. Seemingly no bad thing in a still patchy economic environment, which will likely experience further drags from a possible recession in Europe. That was cited in the BoE statement this morning as a reason to be concerned about slipping into deflation.

However, what an incredible volte face by central banks who have shifted from stalwart inflation fighters to inflation supporters over the past few years. No wonder primary government bond markets are feeling a bit stressed. But the ultimate decision will still rest with the equities.

The reason for that is the equities already acting so strong on the back of improved economic numbers would not seem to need the additional stimulation in spite of the concerns in Europe. And those concerns continue to be real in light of the lack of any agreement on curing the problems on existing Greek debt, with the potential future €130 billion rescue funding hanging in the balance.

While there is some consideration of the canard using an ‘escrow’ in the new funding to pay off the bonds (paying a credit card with a credit card as noted earlier this week), it is also all still down to whether the Greeks will agree to the further austerity and reforms that are being imposed by the funders of the rescue package. Down the road there are also concerns about whether this extreme austerity will indeed produce the expected results.

General Market Observations

As far as the markets go, all remains the same as noted previous with one key addition: the more major support below the March S&P 500 future remains the 1,310-15 area significant congestion and recent UP Break. However, due to the gap higher opening last Friday in the wake of the strong US Employment report, the broad gap between this Tuesday’s 1,332 low and last Thursday’s 1,322.70 Close (from which the market gapped higher) is an additional buffer of support on any near-term selloffs. While resistance remains up into 1,350-55, without a failure back below those lower supports the trend remains up.

The other key factor relates to the March Gilt future, which has the downside leader among the govvies remains quite critical into its 115.00-114.85 support based on daily Closing, even if it has traded below it already.

Thanks for your interest.

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