The interest rate variable is alive, well and affecting global markets. Mario Draghi has played the “WIZARD OF FRANKFURT” as he has sought to forestall a financial implosion of Europe. Draghi’s comments in London on July 26, in that the ECB would stem the crisis at end with the tools at its disposal, markets had to believe that ECB policy would be “SUFFICIENT.” As we all know by now, President Draghi has been successful as the Spanish and Italian yield curves have steepened and the 2-YEAR NOTES have seen its yields dramatically drop–the Spanish went from 7% to 3.73%.
Draghi’s effort has been successful in curbing the immediate crisis and global assets have all been able to rally in the becalmed environment. The moves by Draghi, while having a major impact, have caused political strife among the members of the EU. In a Der Spiegel article, it is noted that at the ECB press conference of last Thursday: “The central bank chief mentioned various ‘options’ that could be extensively reviewed by commissions and possibly implemented at some point … ‘could’ being the operative word, rather than ‘must’.”
As the article goes on to explain, Draghi’s London speech was representative of policy making on the run. In rushing to calm the markets, Draghi had not consulted with many members of the ECB Board. The crisis in Europe was aboil as the short term debt instruments were under heavy selling pressure and Spanish 2-YEAR NOTES were yielding 7%. There is nothing magical about 7% except for it reflected the lack of buying in the post-LTRO financial realm.
If the YIELD CURVE HAD CONTINUED TO FLATTEN BECAUSE OF NO BUYERS, THEN THE ECB AND ECOFIN WOULD HAVE BEEN IN A “CODE BLUE.” As the Der Spiegel article (HOW THE ECB PLANS TO USE ITS BAZOOKA) details:
“The only problem was that the step was precipitous and poorly prepared. The ECB president had left large parts of the central bank leadership in the dark about his foray. In addition, he initially had no idea what the new bond buying program would actually look like.Draghi had only vaguely discussed his ideas with a few of his fellow executive board members. The governors of the national central banks, such as Bundesbank President Weidmann, only learned of the plan through news agencies. And no one was notified in advance in the European capitals,either.”
This seems to reveal why the German financial elite have been very aggressive in their push back. Draghi pulled an Alexander Haig and declared that he was in charge and the financial press wants so much for a crisis resolution that they were driving the get away armored car. President Draghi thought he was back at Goldman and relishing playing with OPM (other people’s money). However, the GOOD BAVARIAN BURGHERS WERE NOT SO COMPLACENT.
***Quick Hitter: Tonight the BOJ meets to announce its policy intentions … NO CHANGE. The overnight rate is 10 basis points and there is where it will stay. There are two new voting members who are having their first meeting. The consensus view is that these two are far more political than the previous BOJ members and are more apt to represent the views of the Ministry of Finance. First meeting will probably not be the one to find the voice of dissent. Again, NO CHANGE.
***In a Financial Times article from August 3, “Rousseff Outlines Contract With Brazil Industry,” Brazilian President DIMLA lets it be known that the government views the social contract between itself and national industry as sacrosanct. In a speech in London she warned Brazilian carmakers not to lay off workers if they wanted tax breaks to help them through tough economic times. “We are giving incentives to guarantee employment. They need to know that this is our sole motive.”
The Rousseff Government has prodded the Brazilian Central Bank to lower interest rates in an effort to stimulate growth. Since the ROUSSEFF ADMINISTRATION has taken office, the Brazilian REAL has dropped from 1.65 to 2.03 … lower interest rates, a depreciating currency and a national industrial policy.
The BRICS are being tossed at the fragile glass houses of the European periphery. What price does the EURO have to drop to for Spain, Italy, Portugal, et al to be competitive with emerging industrial nations. Europe is causing a global slowdown that is forcing many developing nations to adjust their economic growth plans. The sad fact for the Europeans is that Brazil and others are far more agile in responding to the global financial landscape than the indecisive political body in Brussels. For Mario Draghi, there are going to be a lot more could’ve, would’ve, should’ves.