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Event risk could extend today's rally for as much as a week
07/26/2012 2:20 pm EST
European Central Bank President Mario Draghi confirms in a speech today that the ECB is committed to defending the euro and stocks roar ahead. As of 1:15 p.m. in New York the Standard & Poor’s 500 stock index is up 1.43%. The Germany DAX index closed up 2.75%. The French CAC 40 was up 4.07%. And the Spanish IBEX 35 was up 6.06%.
Draghi’s stirring words at a London conference? “To the extent that the size of these sovereign premia [high yields on Spanish and Italian bonds] hamper the functioning of the monetary policy transmission channel, they come within our mandate. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. Believe me, it will be enough.”
Yes, the European Central Bank has the power to intervene in the bond markets by buying Spanish and Italian bonds in the secondary market. It has the ability to extend more loans to European banks. It can cut interest rates again.
But we knew all that. And we also know that there’s substantial opposition at the central bank to each and every one of these actions.
Will the bank move at its August 2 meeting? Will Draghi announce anything at all at the close of that meeting?
No one knows.
But Draghi’s comments this morning reminded traders that the meeting is just a week away and that the European Central Bank could take action that would put everybody who has made money in recent weeks betting against the euro, and Spanish and Italian bonds, and European stocks in danger of giving back all or most of their gains.
So today, we’ve got a new wave of buying as traders square their positions—when you’ve been short, you get back to neutral by buying. And you move to neutral right now because you think the ECB might do something on August 2. (And, of course, the Federal Reserve’s Open Market Committee meets on August 1.)
I don’t see a lot of “somethings” that the European Central Bank can do on August 2 that would have a lasting effect on the euro debt crisis. Which argues that after the meeting, the markets will swing back to a downward trend. But at the moment enough traders have decided they don’t want to be short this market to give us the potential for a week of upward trending prices.
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