Central Banks Influencing Stocks, Bonds

I mentioned yesterday that one explanation for the late weakness in equities yesterday afternoon may have been concerns about how Europe's stock markets would respond to any signaling that might occur from the European Central Bank (ECB) over the possibility of an interest rate hike in March.

The ECB did in fact signal a hike, with the markets now priced for a hike at the March 8 ECB meeting. The bond and stock markets largely expected the signal, but the expectation was not universal, as evidenced by weakness in European stocks and by today's increase of several basis points in Euribor rates, Europe's short-term interest rate.

While the ECB may have negatively influenced the stock and bond markets, more important than today's largely expected news was the reaction in the U.K. market to today's meeting of the Bank of England (BOE). The BOE left rates unchanged, as was expected, but there was nonetheless relief that there was no surprise hike, as was the case on Jan. 11 when the BOE hike rates by a quarter of a percentage point to 5.25%. This pushed sterling rates down by as much as 8 basis points in the futures market for 90-day sterling, a market with nearly 3 million futures contracts outstanding.

For the June 2007 and September 2007 contracts, rates fell by 7 basis points (the December 2007 contract fell by 8 basis points). The decline in U.K. rates is important, as there has been a large amount of influence from London on the U.S. bond market, chiefly because rates are higher in the U.K. than in the U.S., by as much as 50 basis points in the short end of the yield curve.

ALL TONY CRESCENZI BLOG ENTRIES | POST A COMMENT | READ COMMENTS  

---

Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.