Enjoy the Stock Market Rally While it Lasts, Super Mario Draghi’s Bazooka is a Dud
Sep 07, 2012
Not too long ago I mentioned that whatever European Central Bank President “Super Mario” Draghi delivers, it had better be big.
Because the only way he could hope to shore up the beleaguered e uro, wrest control of interest rates from the modern day financial pirates that dominate credit default swaps and break the impasse between skittish investors was with a monetary “bazooka.”
We certainly got one yesterday when he announced an unlimited bond purchase program designed to do exactly this.
The S&P 500 shot up 26.13 points while the Dow and Nasdaq both tacked on 216.01 and 62.80 points respectively. European markets also moved sharply higher on the news as well while Spanish and Italian yields tumbled at maturities of every length suggesting traders relaxed their risk aversion stance considerably.
Under Draghi’s plan, the ECB will be buying unlimited amounts of short-term sovereign debt while also sterilizing that debt– ostensibly to stave off concerns about hyperinflation and further money printing.
Up to now, the ECB has only purchased troubled EU bank bonds as a buyer of last resort. So this is a big change now that Draghi is talking about stepping up as a sovereign debt buyer, albeit also of last resort.
Draghi noted interestingly that the ECB will retain exclusive decision making on when to engage in purchases, the amounts purchased and when to stop. This effectively puts the politicians on notice that further bickering will not be tolerated.