Thursday’s question du jour was: How do you move the euro back from the ($1.20) brink? The answer was relatively simple: Just announce that you are ECB President Mario Draghi and say that “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Well, “it” was good enough for a1.05% move up in the euro, a 0.99% move down in the dollar, and a 209-point rally in the Dow.
Short-term speculative euphoria of the magnitude that the “Super Mario” remarks made in London gave rise to had not been seen since the last “be-all / end-all” EU summit some weeks ago. Of course, we all know how that optimism weathered the ensuing days of market turmoil and bond vigilante assaults. It remains to be seen whether the ECB will need to scoop up some Spanish or Italian bonds or whether it will intervene in some other ways to make Mr. Draghi’s pledge more than the pep talk that some see it as being.
At any rate, something had to be said and/or done, and it came at an opportune time as far as the markets were concerned. The euro appeared all set to show a sub-$1.20 print overnight and Italy’s sovereign rating was cut to CCC+ by Egan-Jones. Only 7% of FX players remained bullish on the euro as of two nights ago. The situation had prompted German Finance Minister Wolfgang Schaeuble to accuse bond traders of being “all wrong in driving up Spanish borrowing costs to unsustainable levels.”
It is a fair assumption to make that all sorts of late-night telephone calls were made to and from certain European high offices in connection with the direction things were headed into during the week. However, now that the declarations have been made, there is still the issue of timeframes during which action needs to be taken and the perennial question of whether or not the markets will treat the statements as meaning “business” this time around.
Not everyone sees a rosy outcome down the road, or an easy path to a resolution, and this is not just because the month of vacations in Europe looms ahead. Critique of the Draghi pledge ranges from “jawboning” to “lipstick on a…PIIG” to “all talk.” Dartmouth College Professor David Blanchflower characterized the Draghi comments as “sounding like panic.” Bloomberg figures that Super Mario now “has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann. The Bundesbank reiterated its opposition to bond purchases today.”
Besides, the promise made by Mr. Draghi was to defend the euro, and there was no mention of who might or might not remain in the eurozone system. For what it’s worth, Citigroup gives 90% odds of Greece bidding good-bye to the euro (and the zone) within 12 to 18 months. Meanwhile, it has been said that Spain has discussed a bailout with Germany, and that the unemployment rate has risen to 24.6% as of the latest count. For now, however, you might wish to circle the date of September 12 on your market calendar. Not much is slated or likely to take place prior to that time.
Precious metals did not fare too badly on the day either; gold added 0.70% to finish at $1,616 and silver climbed by 20 cents to close at $27.54 per ounce. Platinum advanced $5 and palladium rose by four dollars. If the market responses by precious metals and crude oil (up only 0.60%) were not quite as eye-popping as the aforementioned currency market and DJIA developments, perhaps they could be attributed to the fact that the US Labor Department reported a large decline in the number of unemployment claims (to 353,000) last week.
That report, along with the announcement of the fact that US durable-goods orders climbed by 1.6% for a second month in a row, contributed to a bit of a scaling back of QE-related expectations. Of course, today, all eyes are on the GDP figures and they will surely be on the Fed next week. More on both of those topics will follow below.