RISK ON Environment: Expectations for ECB to Lower rates

Markets continue to climb on mounting expectations of central bank doping.

From Bloomberg,

Asian stocks headed for their longest winning streak this year and the Japanese yen declined as speculation grew central banks will act to spur economic growth and U.S. factory orders beat estimates. Gold advanced to a two- week high.

The MSCI Asia Pacific (MXAP) Index climbed for the sixth day and was up 0.4 percent as of 9:01 a.m. in Tokyo, while Standard & Poor’s 500 Index futures were little changed. The yen weakened 0.1 percent to 79.84 per dollar, the South Korean won strengthened 0.3 percent to 1,135.18 per dollar and New Zealand’s currency strengthened 0.1 percent to 80.47 U.S. cents. Gold for immediate delivery rose 0.1 percent to $1,619.15 an ounce.

The European Central Bank is forecast by economists to cut interest rates tomorrow and the International Monetary Fund said further monetary policy easing by the Federal Reserve may be needed. Factory orders in the world’s largest economy rose in May for the first time in three months.

“The ECB story itself will do wonders to keep the risk on for a little bit longer,” said Gavin Stacey, Sydney-based chief rate strategist at Barclays Plc.

The ECB will lower its main refinancing rate by a quarter- percentage point to 0.75 percent, economists in a Bloomberg survey forecast. The Bank of England’s Monetary Policy Committee will raise its target for bond purchases by 50 billion pounds ($79 billion) to 375 billion pounds tomorrow, a Bloomberg survey forecast.

Central bankers better make good of their pledges, otherwise eventually expectations will experience diminishing returns and hope will collide with reality, the outcome of which is not going to be pleasant.

Updated to add:

Perhaps as precursor for tomorrow's highly expected interest rate move (as well as for future injections ala LTRO, where the lowering of collateral terms means more assets to use), the ECB further loosened collateral terms.

From Deutsche Bourse Market News (hat tip zerohedge)

The European Central Bank Governing Council on Tuesday adopted a further change to ECB rules on the eligibility of collateral for Eurosystem refinancing operations.

In its preamble to the new rule, the Governing Council said "counterparties participating in Eurosystem credit operations should be allowed to increase current levels of own-use of government-guaranteed bank bonds subject to the ex-ante approval of the Governing Council in exceptional circumstances."

As a result, the Governing Council adopted the following change to its collateral rules, effective immediately:

"The following Article 4b is inserted in Decision ECB/2011/25:

Acceptance of government-guaranteed bank bonds

1. Counterparties that issue eligible bank bonds guaranteed by an EEA public sector entity with the right to impose taxes may not submit such bonds or similar bonds issued by closely linked entities as collateral for Eurosystem credit operations in excess of the nominal value of these bonds already submitted as collateral on the day this

Decision enters into force.

2. In exceptional cases, the Governing Council may decide on derogations from the requirement laid down in paragraph 1. A request for a derogation shall be accompanied by a funding plan."

So the ECB's balance sheet will be stuffed with even more garbage.