Yesterday we dedicated significant space to the most recent piece of perfectly ludicrous propaganda out of the ECB, namely that monetizing debt with a maturity up to three years is not really monetization but is instead within the arena of "money market management" (images of Todd Akin defining when something is 'legitimate' and when it isn't swimming our heads). The implication of course is that debt under 3 years is not really debt, but some mystical piece of paper that nobody should be held accountable for. Hopefully all those consumers who have short-maturity credit card debt which nonetheless yields 29.95% APR are made aware of this distinction and decide to follow through with Mario Draghi's logic, which is about to take the war of words between Germany and the ECB to the next level. Sure enough, this is precisely the news item that is dominating bond risk markets this morning, if not so much futures, and sending Spanish and Italian 2s10s spreads to record wides on hopes Draghi will definitely announce some sub 3 year monetization program for the PIIGS. Bloomberg summarized this best last night when it commented on the move in the EURUSD, since retraced, that we now have speculation Draghi's move will bolster confidence. In other words: the market is now hoping there is hope. Sure enough, even if Draghi follows through, for the ECB to monetize Spanish bonds, Spain still has to demand a bailout, which however is now absolutely out of the question as mere jawboning has moved the entire highly illiquid curve so steep Rajoy (and Monti) have absolutely no reason to hand over their resignations (i.e., request a bailout). And so we go back to square one. But logic no longer matters in these markets.
A more nuanced summary of the overnight events comes from DB's Jim Reid.
The positive post-Jackson Hole sentiment continued to filter through to European markets yesterday with the US out for the Labour Day long weekend. The Euro Stoxx 600 finished 0.84% higher, recording the strongest gain in a month albeit on volumes which were 25% lower than the average over the same timespan. Commodities continued to do well as Brent added 1.0% and silver (+1.2%) consolidated Friday’s gains. Markets shrugged off a downward revision in Euroarea PMI data (down 0.2pts to 45.1) and were driven stronger into the close following comments from the ECB President at the EU’s Economic and Monetary Affairs Committee in Brussels. In a closed door session, Draghi was reported to have said that ECB intervention would help stabilise the Euro and hence would fall within the central bank’s mandate (Bloomberg). Draghi was quoted by Reuters as saying that purchases in the “short term part of the market where bonds have a length of time maturity of up to one year, two years, or even three years….will easily expire….so there is very little monetary financing effect at all in what we are doing”. It seems he’s building the legal case for any upcoming bond buying. Tempering these comments, German Finance Minister Schaeuble said that Europe shouldn’t “raise false expectations” and that any decision made by the ECB must be within its mandate. All eyes remain fixed on the ECB’s policy meeting this Thursday.
Away from that, German Finance Minister Schaeuble was more upbeat on the upcoming German Constitutional court hearing as he expressed confidence that they will not block the fiscal compact and ESM treaty when the court delivers its decision on September 12th.
Schaeuble added that the German government had carefully reviewed the treaties and could find nothing in contravention with the German constitution (Reuters). In other positive headlines, German Chancellor Angela Merkel said in a speech to members of her own coalition that countries such as Greece “deserve our solidarity” as long as they meet commitments to reform Spain remains in the spotlight with the government’s bank bailout fund, FROB, agreeing to provide EU4.5bn in emergency funds to nationalised lender, Bankia. Spanish media are reporting that the regional government of Andalucia will request an “advance” of EU1bn from the central government’s Autonomous Liquidity Fund, the fourth Spanish region to request central government assistance. Meanwhile, the Spanish Prime Minister continues to insist that he will seek further details on the ECB’s bond purchasing plan before committing to further EU aid.
Moving back to markets, Asian equities are trading with a slightly heavier tone with the Hang Seng (-0.3%) and Nikkei (-0.4%) just in the red. Overnight, Moody’s changed the outlook on the European Union’s Aaa rating to negative which is seemingly weighing on sentiment. We think the outlook change shouldn’t come as a major surprise given that the EU’s key budget contributors, Germany, France, the UK and the Netherlands have all been assigned negative outlooks. Chinese equities are also trading heavy with the Shanghai Composite down 0.4% Local newswires are reporting that Chinese property prices increased for the third consecutive month in August with more than 60% of Chinese cities surveyed recording prices increases. The 21st Century Business Herald is also reporting that China’s big four banks extended RMB220bn in new loans in August (in line with July). Asian credit is firmer overnight, with the IG index trading 3bp tighter. In Australia, the RBA has left the cash rate unchanged, noting that with commodity prices falling sharply in recent weeks, the risks to the economic outlook remain to the downside.
Looking at the day ahead, the key data point will be in the US with the manufacturing ISM (consensus: 50.0) due at 3pm London time. Before that though, we get the latest Eurozone PPI print as well Spanish unemployment numbers. EU President Van Rompuy will be holding talks with Angela Merkel in Berlin at 11:30am, while Italian PM Monti will host French President Hollande in Rome at midday. Greece will be auctioning EU875m in 6 month bills.