All because of rumors - FOCUS: Europe's Markets Pin Hope On Grand ECB Solution
21-Aug-2012
By Katie Martin
Whatever plan the European Central Bank is cooking up to support the region's struggling government bonds, investors are betting it will be good.
Officials have been working hard in recent days to douse speculation on exactly what form this help, first promised by ECB President Mario Draghi in early August, will take. Press reports in recent days that it could involve setting an upper limit on Spanish and Italian government borrowing costs were downplayed, but not denied outright, by the ECB Monday, with the central bank stressing it's too soon to speculate on details.
But the now-familiar cycle of expectation-management by the area's embattled policymakers, and opposition to official bond-buying by Germany, is doing nothing to deter market participants.
Portugal's 10-year government bond yields Tuesday fell to 9.16%--their lowest level since the country's bailout was delivered in May 2011. Spanish and Italian government bond yields are edging down too, with the cost of insuring against an Italian government debt default hitting its lowest point since April. Meanwhile, the Spanish government, and one of the country's biggest banks, have succeeded in raising new funds. The euro itself is climbing against a range of other major currencies and is now nearly four cents above the two-year low it hit at the end of July.
Some elements of these rallies could simpy be corrections from recent sell-offs. And the scope for disappointment at the ECB's next scheduled press conference Sep 6 is daunting to some. The central bank has not intervened in the government bond markets for 23 weeks, and working out how to do it--in the face of German opposition and the risk of alienating existing investors--is tough. For now, though, hopes are running high.
"The quality of denials [that a significant plan is coming] has been exceptionally poor. We don't even need specifics. Either the ECB balance sheet is in play in size or it isn't," said Paul McNamara, London-based investment director at a division of investment-management firm GAM that runs $7.5 billion in assets.
German opposition to the plans is the main wild card. "The only thing that would make me change my view is if it's clear that Draghi tried to do something and was somehow prevented," Mr. McNamara said. "If that happens, find a rock, and hide under it."
Mr. Draghi first stirred hopes of a major plan to relieve tensions in the euro-zone bond markets in late July, when he said the ECB would do "whatever it takes" to save the euro. On that occasion and for most of the time since, markets have concentrated on those three words rather than the three qualifying ones that followed them--"within our mandate", a reference to the considerable legal and political constraints on the bank.
Many were later disappointed when the monthly ECB press conference Aug 2 produced pledges by Mr. Draghi, but few details, and no immediate action. A pull-back in bond and currency markets followed in the middle of August after a wave of objecting statements from German officials.
But now, the notion of caps on borrowing costs for countries willing to enter formal, monitored adjustment programs, is gathering momentum, fuelled by the report about yield-capping last weekend.
"The market is in risk-on mode," said Suki Mann, a credit strategist at Societe Generale in a note to clients. "[The banks] can issue, and they are taking the money and running," he said.
Spanish lender Banco Santander (SAN.MC) issued new debt Tuesday, with a two-year bond backed only by its creditworthiness, rather than by collateral--a tough type of deal to secure in nervous market conditions. That followed other unsecured bank deals on Monday.
Meanwhile in sovereign markets, the Spanish government piggybacked on buoyant market sentiment to increase the amount of short-term debt it had planned to issue, and at a cheaper price than at a similar auction last month.
Such pronounced risk-appetite may be misplaced, some market-watchers warn.
"The Bundesbank's opposition seems to be of little concern to the financial markets at present but we expect this opposition to result in a less aggressive ECB in September than the financial markets currently expect," said Derek Halpenny, a currencies analyst at the Bank of Tokyo-Mitsubishi UFJ in London.
Others note the important distinction between conventional and "non-standard" measures the next time the ECB's council meets.
If the ECB decides to try and ease market conditions by cutting benchmark interest rates from the already record low point of 0.75%, rather that supporting bonds, the euro rally could wobble, said Jaco Rouw, an investor at ING Investment Management, which has $170 billion under management.
By contrast, he added, "if the ECB went ahead with plans to cap yields, that would be the long-awaited big bazooka solution and a real game-changer."
Write to Katie Martin
(Tommy Stubbington, Art Patnaude, Emese Bartha, Serena Ruffoni in London contributed to this article.)
(END) Dow Jones Newswires
August 21, 2012 12:22 ET (16:22 GMT) |
