Central Bankers' Hot Air Shortage

03/07/2013 8:30 am EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

Figureheads like Ben Bernanke and Mario Draghi have been able to talk markets down from ledge often recently, but MoneyShow's Jim Jubak explains how that is getting more difficult.

A test for the week ahead is whether central banker happy talk still has any effect on the market.

The first clue we’ve got from Ben Bernanke and his testimony in front of Congress on February 26 and 27. He said yes, it still works. Bernanke basically talked US stocks up on those two days by saying the Fed was going to continue its policy, had no interest in the near term in reversing its buying of Treasuries, and was going to continue to put money in through quantitative easing to support the economy, blah, blah, blah.

The big question now is not so much Bernanke—his task was relatively minor to reassure the market. Now, we switch to Europe, where Mario Draghi has a really big job after the Italian election.

Basically, what he’s got to do is convince people that somehow nothing has really changed, that Italy is still committed to reform, that Spain and Italy are not about to endanger the euro by going back to the bad old days when yields on Spanish and Italian ten-year bonds were up near 7%...and he’s got to really do this all just by talk.

There are a couple of reasons for that, and I’ll get to that in a minute, but here’s the schedule. The European Central Bank meets on March 7. At that point, we will have had basically a week of turmoil about the Italian elections, but no real action, because parliament in Italy won’t actually meet to organize itself until March 15. We’ve got this big gap.

Draghi’s going to say something on March 7, and he'll probably talk about the Italian responsibility, and how this hasn’t really changed anything, and repeat his promise that the European Central Bank will do whatever it takes to defend the euro.

The problem is that if you look at whatever it takes, there’s a really big caveat there. The caveat is the European Central Bank will do whatever it takes if countries commit to a program of austerity. If you don’t have a government—which is what it looks like Italy doesn’t have—it’s kind of hard to commit to anything, let alone an austerity program.

So Draghi’s somehow got to manage with talk to paper over this big problem. Italy then meets on March 20 to try to select a prime minister, and that will put us into more chaos. But the real important date here is March 7: what will Draghi say, and how will the markets react.

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The Euro: What Comes Up Must Come Down

Euro: Currency of the Year?

Is it Time to Hedge Europe?

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