No one has ever made any money having faith in the ECB – and my skepticism was repaid again last night. Draghi’s non-plan was poorly received by the markets.
Whatever it takes amounted to nothing new – and Draghi reacted poorly when a journalist asked him what’s going on, and accused him of rowing backwards.
Draghi said that the ECB may conduct open market operations, focused on the short end of the curve, where countries ask for assistance.
However, and this is the kicker, he said that the assistance is conditional.
That’s not what the market was looking for – they were hoping for large open market purchases, across the curve, and without conditionality (as were Monti and Rajoy!).
Also, there was no word on the ECB dropping it’s super senior status – so IF they do restart the SMP it won’t help. As the more bonds it buys, the less likely you are to get repaid.
These nations are basically broke — so queue position really matters.
So we have no yield caps, no rate cut (they could cut the refi rate without cutting the depo rate below 0bps), and no ESM banking license – but we do have the prospect of more subordination by the ECB.
No wonder markets didn’t like it.
The ECB has a massive credibility problem, and the more times they pull stunts like this the harder it gets to fix the euro.
Focus now turns to the US data tonight. My forecast is for non-farm payrolls to disappoint market expectations of ~115k tonight (I’m forecasting ~75k), and for the unemployment rate to rise 10bps to 8.3%.
With Europe a basket case, and the unemployment rate rising, the playbook from here seems to belong to Bill Gross … QE3 launch at Jackson Hole, and implementation at the September Fed meeting.
Risk off until then?