Here Comes The Fireworks From The ECB

Published by Filipe R. Costa on Fri, 07/09/2012 - 11:31
ECB fireworks

Daily Market Commentary for September 7: The ECB finally announced a bond-buying program and led equities higher. Investors seem happy for now but many questions remain unanswered.

Yesterday, Mario Draghi announced the anxiously waited bond-buying program, stating it is a duty of the central bank to eliminate the convertibility risk that is being weighted in government bond yields. Draghi promises unlimited funds to bring down borrowing costs but hasn’t stated any yield target. The ECB will only buy government debt in the secondary market and countries will have to apply to the EFSF/ESM facility before benefitting from the ECB help. Basically, a country will need a full bailout or, at least, some precautionary measures, in order to see the central bank purchase their bonds. One positive point of the announced program is how seniority is addressed. The central bank will not have any advantage over other creditors and will be paid pari passu. The negative point about the program is that it is deemed to work as a sterilised bond purchase, meaning the balance sheet is not to expand as the bank will sell other assets to offset transactions.

The bond-buying program just announced is certainly a step into solving the European crisis but not as resolute as it could be. The Eurozone may need some debasement through monetary easing, or, a not sterilised bond-buying, to avoid any appreciation of the Euro as it will have heavy costs for peripheral countries trying to use exports to boost their depressed economies. At the same time, conditionality attached will result in practical problems. The bank says it will stop any purchases if a country fails to comply with the austerity or adjustment imposed by the EFSF/ESM, but if that happens it could result in heavy costs for the whole euro area.

Equities are rising fast but I’m not convinced with it. I will prefer to wait for the next moves from FED next Thursday as I suspect they won’t engage in QE3. This is a central bank-driven market instead of a fundamental-driven one, such that, any disappointment coming from central banks may led to a blood bath in equities.

Later today, the NFP will be released and are expected to show an increase in payrolls of around 125,000. Looking at past economic data and at the ADP report released yesterday, I think the report may well come better than expected. How the market will answer is difficult to say but gold will be under heavy pressure if that happens. Yesterday gold edged down significantly after the ADP was released and is currently subdued by the bears. It may worth short some gold...

Market Last price Close Price % 5-Day % YTD %
CAC 40 06/09/2012 3509.88 3.06 3.87 11.08
Crude oil (Light Sweet) Composite 06/09/2012 9480 -1 0.18 -4.24
DAX (Xetra) 06/09/2012 7167.33 2.91 3.94 21.51
Dow Jones Industrial Average 06/09/2012 13292 1.87 1.41 8.79
EUR/GBP - £ per Euro 06/09/2012 0.7928 0.06 0.05 -4.85
EUR/USD - US$ per Euro 06/09/2012 1.2631 0.25 0.97 -2.49
FTSE 100 06/09/2012 5777.34 2.11 1.01 3.68
FTSE MIB 06/09/2012 15780.25 4.31 6.76 4.58
GBP/USD - US $ per £ 06/09/2012 1.5932 0.18 0.91 2.59
Gold (LBM) $ 06/09/2012 170410 0.58 2.9 8.76
IBEX 35 06/09/2012 7862 4.91 9.27 -8.22
Nasdaq 100 Index 06/09/2012 2829.71 2.27 1.64 24.23
Nikkei 225 06/09/2012 8680.5 0.01 -3.38 2.66
S&P 500 06/09/2012 1432.12 2.04 1.53 13.88