Thursday, 26 April 2018

OMT is not quite OMG but it does the trick

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Credit where credit is due – no pun intended. I watched St Mario’s press conference on telly yesterday and it was a cracking performance. He looked remarkably relaxed and it was clear he was talking to the markets as the ECB’s ally, not its adversary. He knows that, when push comes to shove, the power lies with the lenders and not with the borrowers and that is who he was addressing.

Anthony Peters, SwissInvest Strategist

In the process, Draghi has introduced another acronym to the alphabet soup of rescue plans and life-boats, this one being Outright Monetary Transactions. I’m not sure that another acronym was needed, but perhaps Eurocrats get paid some kind of copyright fees on new ones.

Alas, once distilled, the ECB President said nothing other than that the ECB will form a solid and immovable last line of defence but that it will not take over command at the front line. It will not, as many of us had feared, remove any part of the onus for fiscal discipline from national governments.

If the administrations in Rome and, especially, Madrid are sitting scratching their heads while trying to work out what is in it for them by way of a gift, then Draghi has done his job well. He has pleased the Germans by offering strict conditionality – what those conditions are is unclear – and he has done the right thing for the Club Med by offering unlimited bond buying.

However, in the process, neither side has what it wanted. Madrid wanted unconditional support and Berlin didn’t want a bond buying programme at all. Yesterday global markets traded everything that was in the package but, as we know, ’ere long they could just as easily be focusing on what wasn’t.

Nevertheless, the plan is very clever. Until the governments in question put their hands up and publicly ’fess up to the mess they are in, go to the EFSF first and accept that they need to implement strict fiscal discipline, they get nothing. Only then does the ECB open its wallet but when it does, it will do it in size.

Goodbye Mr BuBa

What many missed yesterday although it was clear to see was the death of the Bundesbank. It has been the moral authority behind the ECB since the idea of the single currency was first mooted and locating this particular European institution in Frankfurt was not a random event. It was set up as “Son of BuBa”.

As of yesterday, the ECB has come of age and it has kissed Dad goodbye. Although most of us loved the idea of a BuBa Mk II (and may still do), things have moved on. Among other, I recall the BuBa’s trenchant attitude that it was not the market’s job to second guess its actions; it did have a significant tendency to be adversarial towards all other than itself and maybe the De Nederlandsche Bank.

Draghi’s little quip, when asked whether the decision had been unanimous, that there had been one dissenting voice and that surely we could guess who that was showed a significant level in confidence and an attitude that kowtowing to the German central bank is over. If Jens Weidmann wants to throw his toys out of the pram, that’s fine by us; we’re not going to pick them up again.

So a good day was had by all. However, does any of this help to resolve the domestic fiscal or economic issues in any of the troubled member states? No. Is the ECB offering Spain’s PM Mariano Rajoy or Italy’s PM Mario Monti a “get out of jail free” card? No.

Does it offer markets the chance to believe that neither of them is heading for imminent default. Yes, it does. And it is this “Yes” which is driving investors back into risk markets and equities to levels not seen since before the Lehman crisis. It seems to have done what it says on the tin – it has created a deep and meaningful back-stop bid and that looks to be enough to assuage fears and bring money back out from under the mattresses.

This was the “big bazooka”. It’s the last roll of the dice. It’s the cowboy, having spent his last bullet, throwing his gun at the Indians. St Mario put on a confident performance

Despite the excitement in risk assets, the response in foreign exchange markets was less enthusiastic as the euro moved marginally higher after an initial sell-off. Proponents of the currency can, quite rightly, argue that it has been rising steadily since Draghi’s “whatever it takes” speech, that forex has seen no need to panic and that it has taken a far more mature approach to the matter than have either bonds or equities. They, it could be said, are now only playing catch-up.

Well, this was the “big bazooka”. It’s the last roll of the dice. It’s the cowboy, having spent his last bullet, throwing his gun at the Indians. St Mario put on a confident performance – it looks to have worked. Let’s see what happens as persistently weak releases inevitably continue to leak out of southern member countries.

Alas, it’s that time of the week again. All that remains is for me to wish you and yours a happy and peaceful weekend. As your young ones return to school, may they bear in mind that although it never too late to learn, it is never too early to do so either. 

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