Courtesy of GS, Sabrient Systems and Gradient Analytics
Excerpts from the latest MarketShadows Newsletter, July 29 2012
Event Horizons
The S&P 500 rose 3.6 percent on Thursday and Friday alone. The rally was triggered when European Central Bank (ECB) president Mario Draghi said, “Within our mandate, the European Central Bank is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.” His statement sent the markets up, UP and AWAY!
The talk didn’t convince former FX trader Bruce Krasting. He wrote in response, “On Friday we got some clarification of what exactly Draghi has up his sleeve when he promised, ‘It will be enough.’ From Bloomberg: ‘DRAGHI’S PROPOSAL SAID TO INCLUDE BOND BUYS, RATE CUT, NEW LTRO [Long Term Refinancing Operation].’
“Bond buys? Rate cuts? New LTRO? That’s Draghi’s bazooka? These things have been tried in the past and have failed. These steps might buy the EU a few weeks (or hours) of market relief, but they have no chance of turning the EU around.”
These measures cannot turn the EU around because the market based-system is not dead yet, in spite of central bank manipulation. Market forces will prevail. Bruce continued, “Draghi thinks he has the power to thwart the markets. He does not have that power. Draghi is either bluffing or lying. That, or he is as blind as a bat…
“An interesting outcome of the Draghi comments is that the Euro ended the week north of 1.2300 (up 1.5%). Whatever chance the EU may have, it is dependent on a weaker Euro exchange rate. In my book, Mario’s words have set the EU back, not forward.” (Draghi – We Will Continue to Fight Until Everyone is Dead)
Instead of Draghi’s promise to save the euro causing a euro selloff, the euro rose, the US dollar fell, and a massive short squeeze in equities followed. Unfortunately, the words “within our mandate” were neglected in the headlines. Perhaps, they were lost on the high frequency trading computers.
In Wolf Richter’s view, Draghi’s main worry now is Spain. The cost of saving Greece is manageable, but saving Spain is prohibitive.
“Despite repeated assurances that Spain would not need a bailout other than the EUR100-billion bank bailout, Spanish Economic Minister Luis de Guindos flew to Berlin to meet with German Finance Minister Wolfgang Sch?uble … to discuss a bailout. For EUR300 billion. And
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