VOLATILE TRADING WEEK AS CENTRAL BANKS MEET

As expected, last week was all about central banks, with the European Central Bank (ECB) and the Fed both holding policy meetings. The case for Europe was a little bit special, as ECB President Mario Draghi had spurred the hope of the markets with comments made on July 26th that the ECB would do "anything within its mandate to preserve the euro." Heading into the ECB policy meeting last Thursday, the global Purchasing Managers Indices (PMI) released for Europe last Tuesday signaled that 10 out of 11 countries reporting the manufacturing PMI figure were in economic contraction. Given the dire economic data and the confident remarks of Draghi, hopes were high for the central bank to provide some form of monetary easing. Immediately on Thursday, however, the market was left disappointed. The ECB had not cut rates, had not committed to further bond buying, and had not launched operation (LTRO) where banks can pledge their government bonds with a maturity of up to three years with the ECB for cash. The ECB lef the door open by referring to future easing by saying that the Governing Council may consider undertaking further nonstandard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, they pledged to design the appropriate modalities for such policy measures. The market was initially very disappointed. The euro currency plunged, stocks sold off and Spanish bond yields climbed back above 7 percent.