Commodities recovered in European session but stock markets weakened further on some new developments in the ECB’s new asset purchase plan. A German newspaper stated that the ECB and the Bundesbank are examining the legality of the ECB's Outright Monetary Transactions. Officials are concerned about the scale and duration the program and want to ensure that it would not breach EU Treaty. Investors worried that the checking would further delay the progress of resolving the sovereign debt crisis in the Eurozone.
At the September ECB meeting, President Draghi announced, while leaving the main refinancing rate unchanged at 0.75%, a new plan, called Outright Monetary Transactions, or OMTs, on asset purchases. Bond purchases will be on the short end of the curve with maturities of 1 to 3 years and of unlimited quantity and would be sterilized. There is also no seniority is granted to the ECB over private investors and countries seeking financial assistance from the OMT are subject to conditionality and would be reviewed consistently. After serving as a positive catalyst in the market for some time, there has been news that implementation of the program is facing barrier.
While Draghi assured that the central bank has been "acting within our mandate, [and] that we are not violating Article 123", German tabloid Bild unveiled that the ECB and the Bundesbank are in the process of checking what size and duration of the program would not lead to breach of the EU treaties. This has raised concerns that the program might not be able to be implemented in unlimited amount and the legal examination would delay the Eurozone debt crisis.
Meanwhile, developments in some debt-ridden Eurozone countries were unpleasant. The Greek government stated that it may need to roll over its debts held by the ECB and/or raise additional short-term debts so as to narrow the budget gap. Finance minister Christos Staikouras admitted that "With a view to covering the financing gap, and given that the Eurosystem is holding 28B euro of Greek bonds maturing in 2013-2016, the possibility of rolling over the maturities will be examined”. Spain will present its draft budget plan for 2013 later this week. Despite surge in bond yields, the country has not yet made a formal request for financial assistance from the EU. This has added further uncertainty to the already dire situation.
On the dataflow, Canada’s retail sales probably gained +0.2% m/m in July after dropping -0.4% in the prior month. The BOC is the only major central bank that has hinted the next move would be a rate hike. In the US, consumer confidence probably climbed +2.6 points to 63.2 in September. Concerning the housing market, the S&P/Case-Shiller Composite-20 index migith have risen +1.1% y/y in July, following a +0.5% gain in June, while the housing price index added +0.7% m/m in July.
Oil and Gold Reports contributed by Oil N' Gold
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