Global capital markets focused on issues related to Europe for the balance of the week, as better than expected economic data out of the US during the weak help lift riskier assets.  Markets seem to  price in in-line employment data after absorbing important monetary policy changes from the Bank of England.  The disappointment over no-change to the ECB policy, took some wind out of the sales of European bourses.  The Euro seemed to perform well despite a downgrade to Italian debt during mid week.

The Bank of England, decided not to wait for the quarterly inflation report but announce GBP75 billion additional bond purchases over the next four months.  Although many recognized it was possible, only less than half the economists surveyed expected the asset purchases to be announced.  Additionally, recent data, which included stronger than expected manufacturing and service PMIs seemed to discourage the undecided.     The central bank announced that it will buy GBP25 billion of gilts across a range of maturities in three weekly auctions.

The ECB kept its main interest rate at 1.5% for a third straight month, after raising it in increments in April and July. Although it had been expected, the decision disappointed some economists who had hoped for a more decisive response to signs that Europe may be sliding into another recession.

Some ECB governing council members pressed for lower rates but were overruled. The ECB doesn’t release vote tallies, but ECB President Jean-Claude Trichet said the decision was taken by consensus, which is ECB code for several dissenting votes.

In the US, better than expected ISM manufacturing and ISM services, helped equity markets rally.  On the jobs front, the ADP employment number and initial jobless claims also were better than economists had expected.  The BLS employment report was better than expected adding more than 100k jobs, were most expectations were for an increase of 55k.

The Bank of England kept rates on hold as widely expected.  While there has been much discussion, if not consternation, over the possibility of QEII in the US, many observers have missed the creeping talk, in part encouraged by BOE Governor King, of another round of asset purchases by the BOE.  Similar to the Fed, if it does transpire, most are not expecting it imminently.  Talk in the UK is that a window of opportunity (necessity?) may open Q1next year as fiscal contraction kicks in.   Meanwhile, one of the reasons that the BOE explains some of the inflation pressures that have required it to formally explain itself to the Treasury is sterling’s past decline on a trade-weighted basis.  That decline of sterling, however, has not been sufficient to help the trade account very much, underscoring our sense that officials and investors often exaggerate the role of exchange rates.  The UK’s July trade deficit of GBP8.67 bln was nearly 20% larger than the market expected after a GBP7.5 bln deficit in June.  The deterioration was roughly spilt between EU and non-EU.   Like the US and Canada experienced in June, the UK recorded an import surge in July.   Imports rose a sharp 3% on the month, while exports were off 0.9%.  Some may see the import surge as a sign of a stronger domestic economy.

The Euro today declined from the high of 1.4440 which was made on December 31, 2009, to take a rebound beyond 1.4335, last seen around 1.4350, as fresh Manufacturing data lent confidence that the Euro Zone economy was upbeat. The Euro Zone manufacturing PMI rose slightly to 51.6 in December compared to the previous month, while German PMI rose to 52.7 compared to 52.4 for the same period.

Both the Euro and the pound saw a huge jump of 70-100 pips in the early European trade today. The Pound had earlier rallied to peak at 1.6235 on the last day of the previous year, correcting this year so far, to below 1.6070, against the dollar.

The Pound has also jumped as the PMI (manufacturing) and household lending data provided a positive sentiment to the currency markets. The Pound benefitted as the PMI jumped to 54.1 in December compared to 51.8 in the previous month, when the market expected a decline. Furthermore, the BoE suggested a sharp increase in housing lending to over £1 billion compared to nearly half that amount in the previous month.