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By Shavasb Bohdjalian
Certified Investment Advisor and CEO of Eurivex Ltd.
Global share prices and the euro rallied sharply, boosted by expectations that the U.S. Federal Reserve and European Central Bank will provide stimulus to support their struggling economies.
Risk appetite remerged after ECB President Mario Draghi said the central bank would do whatever it takes to preserve the euro, a message echoed by German Chancellor Angela Merkel, French President Francois Hollande and Italian Premier Mario Monti.
This raised expectations that the ECB could take bold measures to lower soaring Italian and Spanish borrowing costs and supported riskier assets.
It remains to be seen if ECB policymakers would deliver in line with market expectations when they meet on Thursday, and if “Super Mario” as many are now referring to ECB President Mario Draghi can follow-up his bold statements and rhetoric with concrete action.
Germany's Bundesbank has in the meantime said it is opposed to a resumption of the ECB's bond-buying program. Reuters also reported that German Economy Minister Philipp Roesler warned the ECB about any large-scale government bond purchases and a German government spokesman on Monday reiterated Berlin's opposition to any form of mutualisation of euro zone debt.
The odds are that the ECB will fall short of expectations, sending a new wave of disappointment which will lead to the building of new short euro positions against all major currencies and renewed selling of Italian and Spanish bonds.
The Fed is also holding a policy meeting on Wednesday with most economists polled by Reuters and Bloomberg expecting no change in policy, but analysts are bracing for some sort of indication from Fed Chairman Ben Bernanke about some kind of action in the face of the unemployment situation, with the headline jobless rate stuck at 8.2% and the slow growth environment, which is not creating enough jobs.
The Fed has already launched two quantitative easing (QE) programmes, during which the Fed buys US Treasury bonds, helping push borrowing costs lower in an effort to lower interest rates for the benefit of the economy in general. It remains to be seen how successful a third QE programme will be considering that bonds prices and are at all-time record high while bond yields are at record low.
The same cannot be said for the ECB, which unlike the Fed, the Bank of England and the Bank of Japan has resisted to launch a major QE programme. Instead, the ECB has lent more than EUR 1 trillion to banks for 3-years and is providing liquidity to banks by accepting their government bonds as collateral.
An economist at Goldman Sachs said one of the options available to the ECB is to buy unsecured debt of banks or firms via the national central banks to spare its own balance sheet while others expect policymakers to give the ESM access to ECB funding.
Central bankers can at any given time raise expectations, but if they fail to deliver, they are likely to cause even more damage. As both Bernanke and Draghi have repeatedly said, the central banks have stepped in far many times than their mandate allows them and its time for politicians to step up and deliver fiscal solutions to the debt crisis now hurting both the US and the EU.
(Eurivex Ltd. is a Cyprus Investment Firm, authorized and regulated by CySEC, license #114/10 and approved by the Cyprus Stock Exchange to act as Nomad for listings on the Emerging Companies Market. The views expressed above are personal and do not bind the company and are subject to change without notice)
