Friday, 7 September 2012

Mike Lenhoff: Draghi does the trick

Mario Draghi. Image courtesy of the World Economic Forum
Following the ECB’s press conference yesterday, market reaction has been more than gleeful. On Wall Street, the major indices hit new post-financial crisis highs and the FTSE Eurofirst 300 Eurozone Index has now convincingly broken through the resistance shown in the chart on the next page. Both the Spanish and Italian bond markets performed well and importantly, so did eurozone banks – and not just Spanish and Italian banks, but French banks too. You judge a financial crisis by the banks and the reaction in the board rooms, which must now be applauding Mr. Draghi. First came LTROs (Long-Term Refinancing Operations) and now come OMTs (Official Monetary Transactions).

Our line used repeatedly in notes along the way has been that the eurozone sovereign debt crisis put at risk the stability of the financial system and with this the stability of the global economy. Our line on the last EU summit meeting in June was that it provided something of a watershed for the leaders of the eurozone in agreeing to what was the ‘vision’ for full integration, starting with the banks.

That meeting likely laid the ground for Mr Draghi’s re-think, not just on the need to ‘repair’ the transmission mechanism for monetary policy, but for a more progressive and cooperative approach to ECB policy in helping, rather than obstructing, the long term ambition of full integration and debt sustainability for the eurozone. And while the Bundesbank may think otherwise, the ECB is now ready to help in a manner that falls within its remit for monetary policy. More >

Mike Lenhoff
Chief Strategist

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