Thursday's Hangover : FED - Quid ECB - Bomb shell ?
Well we had quite a colorful US morning session yesterday. In the first half hour after the opening bell, an algo trading program went bananas affecting some 148 stocks amongst which some very big names. For more info on this we refer to
Now over to the more "serious" stuff and the market reaction to the FOMC decision. Bearish language, the expected low rate commitment until at least end of 2014 and setting hopes on Congress to sort out the budgetary mess. Ready to act but no new monetary initiatives. Has the toolbox run dry ? Is one afraid of negative rate territory ? Or is one trying to pull the psychological trick that when nothing new is required, we are basically OK and thus up we go ? Difficult to read this one but the US Treasury in the mean time announced something new (or fairly new) : From next year onwards, the US Treasury will next to the usual T-Bills and bonds also issue floating rate Treasuries (3 and 6 month ibor reset). And it could involve a substantial program up to 70-100 bio USD. Is this required to convince foreign investors to buy US debt with a safe duration feature ? Yep, and the Chinese are back in the game.
Now over to Europe and this afternoon's big one. Well big one because Mario wanted it this way in view of his speech last Friday. And in combination with the Hollande/Merkel announcement, it sounded as if it was a pretty done deal. Now we had some radio silence and we know Draghi and Weidemann are in marathon session to come out with something. From what we thought was the most easy part - granting the banking license to ESM - it seems this is no longer evident. And when it comes to printing à la FED/BoE/BoJ, the Germans are not going to give a free green light. So has Mario cornered himself ?
Lets have a look at what has happened over past 10 months. Also back then, we had a sovereign debt crisis up-flaring and a full blown bank liquidity crisis. So Mario creatively tried to solve both issues by LTRO 1 and 2 : a lender of the last resort - in full compliance with its legal capabilities - granting over 1,000 bio of loans against collateral by which it secured bank refinancing for the next 3 years. And with the abundant liquidity, it hoped/urged banks to use the excess money to shore up sovereign debt, by this depressing Spanish and Italian yields. It succeeded for a brief moment in time because when Spring went into Summer and the Spanish Summer went into a Russian Winter, it's back to square 1. For an overview of the main balance sheet operations :
So if outright bond buying is not on the menu when Weidemann gets his way, does it mean Mario comes home empty handed ? Not necessarily ; check the last link and the graph underneath. It concerns the SMP or Securities Markets Programme :
Now this program came to life after the first EMU crisis outburst following the Greek debt saga. And in those days - because of unusual uncertain market circumstances - the ECB started the buying program especially on Greek bonds (approx 60 bio EUR) ; on the side, it did on a much smaller scale the same for covered bonds ; In autumn 2011, it repeated the exercise mainly focusing on Spain and Italy. Mind you, this was still under Trichet, not Draghi, with the programme stopping at 212 bio EUR cumulative. Then came Draghi, LTRO 1 and 2 and the programme has not been reactivated ever since (nov 2011). So is this what Draghi was hinting at last week, saying there were plenty of options, a kind of joker up the sleeve and threat to Weidemann : "if you don't play along, I invoke the special Securities Markets Programme". Could well be the case. Any way, Mario has now provided markets with a target and they might come out and test it : Send those yields back to 6%/7% plus territory. But then of course Mario will have every right to invoke this pogramme because of uncertain and stressful market circumstances....
So we've reached critical position of the chess middle game. Position is very much closed with opponents defending their pieces and trying to exert pressure on each other's weak squares. You can end the game by shaking hands and call it a draw. Or you can pull a magician's trick by dropping an unexpected bomb shell on your opponent's firewall. Is Draghi like Mischa Tal, a magician or attacking maniac (or both) ? We will very soon find out.