ECB must act on Thursday to prevent euro market blowout

darkman2

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,”



Last week when Spain and Italy's bond yields surged to dangerous levels it seemed certain the game was up. Then Mario Draghi, the head of the ECB, came out last Wednesday and gave his "all that is necessary" speech and the market rallied on the belief that action is imminent from the ECB. It certainly worked somewhat - whilst Spain and Italy's yields are still at unsustainable levels they have come in somewhat and more broadly stock markets have rallied too all because of what Draghi said last week.


And there in lies the problem. Draghi will have to face probing questions from the media on Thursday at the ECB board of governors meeting about exactly what the ECB has in mind and either that process must be in place by Thursday or he has to give concrete proposals as to what the ECB intends to do. If he can't do that or if the proposed action does not live up to expectations then a massive sell off seems the most likely scenario. In the process Spain and Italy would be locked out of the market as yields soar again. All gains over recent days would be erased.

The crucial question is has Draghi oversold this too much in his words last week? A sell off may be inevitable regardless of whether or not initiatives like bond buying are taken if they do not reach expectations the market has priced in.

I'd assume the market needs at the very least the reinstating of the buying of sovereign bonds by the ECB on the primary and secondary markets. The EFSF or ESM could do this on the primary markets which would provide extra fire power. In addition they could look at a new LTRO package for banks that could use the cheap loans to buy government bonds.

If none of this happens on Thrusday, if nothing of substance is forthcoming, or if there is a row back the market will surely blow out. The ECB and more exactly Mario Draghi will have lost some credibility aswell.

So do you expect something big from the ECB this week or do you reckon all this build up will turn to dust in disappointed and the market will tank?

NIMAN

darkman2 wrote: »

So do you expect something big from the ECB this week or do you reckon all this build up will turn to dust in disappointed and the market will tank?

I'll say NO, based on the fact that this crisis is now 4 years old and nothing 'big' has been done by anybody in that time to solve the problem.

Gurgle

darkman2 wrote: »

all this build up will turn to dust in disappointed and the market will tank

+= again

Since banking crisis day 1, the only EU policy has been to save failed private businesses at any cost.

Dannyboy83

According to the media and expert commentary, the Euro has been due to collapse this week!!, for the last 208 weeks...
B]Yawn[/Bbut this time it's different. This time it really will collapse! [/Yawn]


The assault has been relentless, yet the Euro has taken everything and still comes back for more.
Have the media ever remarked on how resilient the currency has proven to be? :rolleyes: LOL!


I'm fully Euro Crisis'd out.
I simply can't be arsed keeping up with it anymore... it's starting to remind me of Herr Hitler claiming that the Soviet Union was on the verge of defeat while they were lining up their artillery outside Berlin...

Spain and Italy are the flavour of the month right now. That's about the height of it imo.

Gurgle

Dannyboy83 wrote: »

Have the media ever remarked on how resilient the currency has proven to be?

So this is the policy: It's looking after itself, do nothing in case we kill it.

darkman2

Dannyboy83 wrote: »

Spain and Italy are the flavour of the month right now.

A bailout of up to €500bn is imminent now for Spain. Today was the last throw of the dice and the ECB somehow comes out looking more incompetent than they did before. What the ECB essentially said was - "you have to tap the EFSF if you want help from us" - Spain has to ask for a bailout.

Prime Minister Rajoy was asked today would Spain need a bailout and for the first time he declined to answer. The hopelessness of Spain's situation is starting to dawn. It's bond yields increased this afternoon by the largest 1 day margin in 18 years back well over 7%.

The denials in Italy continue unabated though. Monti adamant his country won't need a bailout...

bull_ring

what happened today was the mother of all climbdowns by draghi , he obviously incurred the wrath of his masters at the bundesbank by pumping up expectations last week with his pledge to do anything

the markets took a massive dump of euro stocks today , wish i had done the same yesterday evening :mad:

Scofflaw

bull_ring wrote: »

what happened today was the mother of all climbdowns by draghi , he obviously incurred the wrath of his masters at the bundesbank by pumping up expectations last week with his pledge to do anything

the markets took a massive dump of euro stocks today , wish i had done the same yesterday evening :mad:

I've seen that comment in various places, but I'm not sure exactly what's supposed to be involved in the 'climbdown'. What did Draghi promise in London that he didn't deliver today (since that seems to be the mismatch)?

Or is this one of those cases where the markets and media believed he was going to do something he didn't say he'd do, and were then disappointed when their own predictions weren't borne out?

As per darkman2's OP:

if the proposed action does not live up to expectations then a massive sell off seems the most likely scenario

Was there some action specified, or was it just a case of overdone expectations? If the latter - as it seems to be - I'm not sure how it's supposed to be evidence that the Bundesbank has the ECB in its pocket. On the contrary, that seems to me to be a rather lazy remark.

cordially,
Scofflaw

hmmm

darkman2 wrote: »

Today was the last throw of the dice

Last throw of what dice? The ECB have quite rightly said they're not going to bail out the Spanish & Italians without them putting in place austerity measures.

You've been reading too many US commentators who don't understand EU/Eurozone politics. They expect overnight "solutions" without understanding that multiple sovereign governments have to be consulted and agree. The US commentators go crazy every time a local politician in some Euro country says one thing, as if it is indicative of thinking in the entire Eurozone. It's nuts.

As for your "last throw", eh no. Multiple last throws exist, I wish people would stop the drama queen impression - for one, the ECB could "fix" this problem overnight by buying up every piece of Eurozone debt offered, but for a number of very valid reasons they don't want to go down this path.

darkman2

hmmm wrote: »

Last throw of what dice? The ECB have quite rightly said they're not going to bail out the Spanish & Italians without them putting in place austerity measures.

You've been reading too many US commentators who don't understand EU/Eurozone politics. They expect overnight "solutions" without understanding that multiple sovereign governments have to be consulted and agree. The US commentators go crazy every time a local politician in some Euro country says one thing, as if it is indicative of thinking in the entire Eurozone. It's nuts.

As for your "last throw", eh no. Multiple last throws exist, I wish people would stop the drama queen impression - for one, the ECB could "fix" this problem overnight by buying up every piece of Eurozone debt offered, but for a number of very valid reasons they don't want to go down this path.

Don't get me wrong. I am not in favour of buying up Spanish/Italian bonds unless a strict programme of austerity measures is in place.

But...

I never said the ECB could fix anything. And they can't go around willy nilly buying up bonds - they have a bloated balance sheet already. BUT they could have calmed the market today - they had a number of options - limited bond purchasing, LTRO 2 or a banking license for the ESM. None have been progressed today.

And, i'm afraid in reality that was the last chance for Spain to avoid the humiliation of a full sovereign bailout. And anyone who thinks Spain does not need full external assistance at this point has no credibility. They will have to tap EFSF funds according to Draghi and accept interference and intrusive oversight in their affairs similar to that here by the troika if that want the ECB to work on their behalf in the bond market. The ECB WILL NOT intervene until then. That was made clear today. So Spain is at the mercy of the market until they finally submit. Yields tomorrow i'd imagine will surge to near 8%....they are locked out of the debt market effectively. Any pretence is gone.

hmmm

darkman2 wrote: »

And, i'm afraid in reality that was the last chance for Spain to avoid the humiliation of a full sovereign bailout. And anyone who thinks Spain does not need full external assistance at this point has no credibility.

So what, we've known this for a long time. Spain and Italy have to live within their means, if that's seen as "humiliation" then pity about that.

The ECB seem quite happy to allow those countries who can't balance their books enter an austerity program, and rightly so. I don't want to see the ECB putting my tax money on the line to allow the Spanish and Italians live the life they think they deserve. Draghi has made it clear that once they implement the necessary reforms, the ECB can act.

hmmm

darkman2 wrote: »

I never said the ECB could fix anything. And they can't go around willy nilly buying up bonds - they have a bloated balance sheet already.

That sounds like some buzzwords you've picked up. The ECB's balance sheet is almost irrelevant, they're not a commercial bank.

darkman2

hmmm wrote: »

The ECB's balance sheet is almost irrelevant

Are you serious? It's not irrelevant. What do you think happens when the ECB buys a bond? And what exactly is the ECB doing with "your" tax money? Nothing. It has nothing to do with your taxes. And please don't try and insult my intelligence either. If you want to have a debate with another poster have a bit of common courtesy at least. The same courtesy I have shown you.

hmmm

darkman2 wrote: »

Are you serious? It's not irrelevant. What do you think happens when the ECB buys a bond? And what exactly is the ECB doing with "your" tax money? Nothing. It has nothing to do with your taxes. And please don't try and insult my intelligence either. If you want to have a debate with another poster have a bit of common courtesy at least. The same courtesy I have shown you.

I'm not getting into a discussion about fantasy-land economics.

darkman2

hmmm wrote: »

I'm not getting into a discussion about fantasy-land economics.

What are you talking about?

bbam

Can I go back to the good Old Irish parish pump politics mentality and ask. "will Spain or Italy asking for a Bailout have any effect here"

"the end of the euro currency" has been thrown round so much that it's a worn out statement at this stage. Or is it going to be like the boy who cried wolf story and the wolf is going to turn up at some stage and eat us up?

darkman2

bbam wrote: »

Can I go back to the good Old Irish parish pump politics mentality and ask. "will Spain or Italy asking for a Bailout have any effect here"

"the end of the euro currency" has been thrown round so much that it's a worn out statement at this stage. Or is it going to be like the boy who cried wolf story and the wolf is going to turn up at some stage and eat us up?

Answer to question 1 - yes it will in some way. Market contagion and exports vulnerable to recessionary neighbours.

Answer to question 2 - nobody has said here the euro will fall apart. This thread is about Spain and Italy and the problems in those countries. It does not mean the euro will fall apart in fairness. But there is an outcome where the currency union is smaller with some members leaving that is not all that unlikely.

bull_ring

Scofflaw wrote: »

I've seen that comment in various places, but I'm not sure exactly what's supposed to be involved in the 'climbdown'. What did Draghi promise in London that he didn't deliver today (since that seems to be the mismatch)?

Or is this one of those cases where the markets and media believed he was going to do something he didn't say he'd do, and were then disappointed when their own predictions weren't borne out?

As per darkman2's OP:



Was there some action specified, or was it just a case of overdone expectations? If the latter - as it seems to be - I'm not sure how it's supposed to be evidence that the Bundesbank has the ECB in its pocket. On the contrary, that seems to me to be a rather lazy remark.

cordially,
Scofflaw

oh please , draghi ( sincerity and resolve etched across his face ) told the world ( and the markets ) that the ECB were prepared to release any kind of cracken nesscessery to solve the crisis , he let the genie out of the bottle and tried to stick it back today after presumabley having been given one hell of a dressing down from merkel

will take an even bigger bazooka to placate and win over the markets next time , nothing short of a commitment to political union is likely to wash , todays damp squib could see european markets languishing for the rest of the year

darkman2

Selloff continuing today. Spanish 10 year bond up past 7.4% in early trading. Italy up past 6.4%.

On the positive side a big drop in the yield on short term Irish government bonds early this morning but Irish long term under some selling pressure too.

Scofflaw

bull_ring wrote: »

oh please , draghi ( sincerity and resolve etched across his face ) told the world ( and the markets ) that the ECB were prepared to release any kind of cracken nesscessery to solve the crisis , he let the genie out of the bottle and tried to stick it back today after presumabley having been given one hell of a dressing down from merkel

will take an even bigger bazooka to placate and win over the markets next time , nothing short of a commitment to political union is likely to wash , todays damp squib could see european markets languishing for the rest of the year

That doesn't actually answer my question, though, which was honestly intended! The ECB said in London it would do everything within its mandate, and seems to have reiterated that yesterday - expectations, however, seem to have revolved around the ECB doing something outside its mandate?

cordially,
Scofflaw

Scofflaw

Bloomberg offering balanced views:

ECB President Mario Draghi offered only a glimpse of the new strategy, with the actual interventions weeks or months away and a host of obstacles standing in the way before Europe can claim to be on a path out of the crisis that emerged in Greece in late 2009. Investors looking for a quicker fix pushed down the euro, European stocks and bonds of at-risk countries.

“All of the announcements, if transferred into actual activity, would be close to the big bazooka approach that the markets are looking for,” said Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London. “Market disappointment is hardly surprising in this context but we may well find this lays the groundwork for the grand plan in coming weeks.”

and

“The big bazooka is Draghi’s implied promises, which have not been delivered upon,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “Markets are saying this is all talk, there’s nothing concrete.”

http://www.bloomberg.com/news/2012-08-02/ecb-politicians-anti-crisis-bargain-emerges-after-2-1-2-years.html

As to this:

Selloff continuing today. Spanish 10 year bond up past 7.4% in early trading. Italy up past 6.4%.

Spanish 10 year seem to have peaked at the figure mentioned, and are already down to 7.1% - something of a reminder that rate snapshots are of little value. The Spanish 10 year rate isn't as high as a week ago, same for Italy, so "the selloff continues" is very much an exaggeration.

cordially,
Scofflaw

darkman2

Scofflaw wrote: »

The Spanish 10 year rate isn't as high as a week ago, same for Italy, so "the selloff continues" is very much an exaggeration.

That's got to be down to low volumes though. Market imperative now is to force Spain to take a bailout and trigger the ECB buying up short term bonds. It's too dangerous for traders to short the bonds at the near end (2, 3 year) because the ECB is aiming to buy those particular bonds post bailout request hence short term yields have fallen significantly. It's going to be done at the long end (5, 10 year). Trading is thin. So I guess they have a couple of weeks grace period. If this was the end of August it would not be as static as it is at the long end.

Scofflaw

darkman2 wrote: »

That's got to be down to low volumes though. Market imperative now is to force Spain to take a bailout and trigger the ECB buying up short term bonds. It's too dangerous for traders to short the bonds at the near end (2, 3 year) because the ECB is aiming to buy those particular bonds post bailout request hence short term yields have fallen significantly. It's going to be done at the long end (5, 10 year). Trading is thin. So I guess they have a couple of weeks grace period. If this was the end of August it would not be as static as it is at the long end.

Fair enough - we'll see how it goes!

cordially,
Scofflaw

darkman2

Scofflaw wrote: »

Fair enough - we'll see how it goes!

cordially,
Scofflaw

Just to add check out the fall in the Irish 1 and 2 year bond yields;)


Very attractive to investors because Ireland is already in a program thus assumption is automatically the ECB is going to buy some of these bonds

http://www.bloomberg.com/quote/GIGB1YR:IND/chart


There was a positive to Draghi's statement in hindsight just not for Spain (until they swallow some pride):pac:

hmmm

A disaster for the markets today as predicted by the OP. The Italian market completely tanked, closing up over 6%


DJIA 13,096.20 217.29 1.69%
S&P 500 1,390.99 25.99 1.90%
NASDAQ 2,967.90 58.13 2.00%
TOXX 50 2,372.58 109.22 4.83%
FTSE 100 5,787.28 124.98 2.21%
DAX 6,865.66 259.57 3.93%

Scofflaw

hmmm wrote: »

A disaster for the markets today as predicted by the OP. The Italian market completely tanked, closing up over 6%


DJIA 13,096.20 217.29 1.69%
S&P 500 1,390.99 25.99 1.90%
NASDAQ 2,967.90 58.13 2.00%
TOXX 50 2,372.58 109.22 4.83%
FTSE 100 5,787.28 124.98 2.21%
DAX 6,865.66 259.57 3.93%

Erm, sorry, hang on a second...these are Spanish sovereign bond yields:

2YR: 3.95500 down 18.12%
5YR: 5.85200 down 8.31%
10YR: 6.84800 down 4.42%

Italian:

2YR: 2.50900 down 19.53%
5YR: 4.29700 down 10.61%
10YR: 5.32700 down 4.79%

I'm finding it kind of hard to reconcile those drops with the tale of markets reacting with horror to the ECB's announcement...surely those sovereign yields should be going the other way? And why are we suddenly being quoted stock markets rather than sovereign bonds? Surely not because they're doing the "right" thing?

puzzled,
Scofflaw

darkman2

There was a market rumour doing the rounds earlier that Spain would formally request EFSF assistance today. In the event that did not happen. But Rajoy (the PM) said he had made "no decision" yet on whether Spain would request assistance. This is a signal that a bailout request is imminent. That is why the long term yields were reigned in. The short term yields dropped because as I said above once the bailout is requested they are the bonds the ECB will buy so no trader is going to short them now unless they are completely stupid. It buys Spain 3 or 4 weeks at the very most to get it's affairs in order for the bailout and that is backed up by market analysis today. They will get away with it for the holidays. The stock market is a proxy dead cat bounce IMO. Nothing significant there. Spain is bust, it's banks are bust and it's society faces a real test now.

hmmm

Scofflaw wrote: »

I'm finding it kind of hard to reconcile those drops with the tale of markets reacting with horror to the ECB's announcement...surely those sovereign yields should be going the other way?

Well that's the point. Once the markets got over the initial (and inevitable) moaning of US commentators who were expecting some sort of unilateral ECB action, the markets recovered strongly as the implications of Draghi's speech sunk in. In particular short dated bond yields have dramatically dropped.

hmmm

darkman2 wrote: »

It buys Spain 3 or 4 weeks at the very most to get it's affairs in order for the bailout

Eh?

How can Spain "get it's affairs in order for the bailout"? The only reason they need a bailout is because they haven't got their affairs in order.

Dead cat bounce for the stockmarket? Based on what analysis? US jobs numbers are better than expected, the ECB has offered a credible path out of the Eurozone crisis and stocks are not overvalued based on current profit levels.

Scofflaw

hmmm wrote: »

Well that's the point. Once the markets got over the initial (and inevitable) moaning of US commentators who were expecting some sort of unilateral ECB action, the markets recovered strongly as the implications of Draghi's speech sunk in. In particular short dated bond yields have dramatically dropped.

That's pretty much what I was seeing. It's just that I was also seeing a lot of declarations that the end was nigh (again) because what the ECB had done was not what had been promised on account of having been reined in by the Germans, the evidence for which was supposedly the markets "tanking".

I found that hard to reconcile with the really quite large falls in the sovereign bonds of those countries most obviously affected. Nor am I sure what's supposed to have been promised but not delivered, because I can't see any specific promises in the London material.

cordially,
Scofflaw

darkman2

The trading week has begun. I expect sovereign short term yields to fall but pressure will come on long term yields to force Spain into a bailout. That is what the market wants - that's what it will get in the end. Not this week, but rather next month. Short term traders are not going to short because the ECB will rape them when Spain takes the bailout. Long term no risk and everything to gain by forcing Spain into a bailout. I think the yield curve will unwind from inverted and become more traditionally curved but steeply so. The short term yields will sink while the long term soars.


PS Irish short term yields will benefit greatly from the ECB policy for the government.

darkman2

My prediction is being born out, traders just won't short - Irish 1 year bond is down 17% this morning to 2.4% - Australia borrows more expensively for it's 1 year bond. That's early morning trading though - it will be up and down like that.

BKtje

What is the advantage to the markets if Spain gets bailed out? I never quite understood that.

I would have thought that they would prefer that they didn't as a bailout runs the risk of including a haircut and the loss of Spain buying bonds while in the bailout programme. I realise that there are plenty of other countries to sell bonds too but I don't see the advantage per se. Could someone explain please?

Scofflaw

Er, the Spanish 5 and 10 year bonds aren't rising either - 5 Year is back below 6%. Not fallen by as much as the short bonds, but also fallen. I have to reiterate BKtje's question - of what advantage is it for the markets to 'force' Spain or Italy into bailout territory? I too would have thought the main risk for sovereign bond-holders is the risk of PSI in a bailout.

cordially,
Scofflaw

Voltex

Scofflaw wrote: »

Er, the Spanish 5 and 10 year bonds aren't rising either - 5 Year is back below 6%. Not fallen by as much as the short bonds, but also fallen. I have to reiterate BKtje's question - of what advantage is it for the markets to 'force' Spain or Italy into bailout territory? I too would have thought the main risk for sovereign bond-holders is the risk of PSI in a bailout.

cordially,
Scofflaw

I would have thought Spain was a long way off PSI. If Spain does request asisstance, wouldnt it be in the form of the ESM buying Spanish bonds in the first instance?
Ive heard that the new ROC is actually to get back your money, so if you have some Fixed Income assets backed up by the ECB/EU, that would be a pretty nice place to be.