Richard North, 04/08/2012  

Draghi 998-ukk.jpg

After the heady events of the last few days, the Grauniad finishes off the week by telling us that the stock markets in Europe and the US have decided they now like what Draghi is proposing.

The rally, we are told, "was assisted by upbeat news from the American labour market", leaving shares to close at their highest level in three months. But the biggest driver, it seems, was a "rapid reappraisal" of Draghi's plan to end Europe's long-running sovereign debt crisis.
Analysts said the promise of action if countries were prepared to sign up for tough deficit-reduction programmes was a sign that Europe was at last getting to grips with its problems.

Holger Schmieding, economist at German bank Berenberg, says: "On 2 August, the ECB finally stepped up to the plate meaningfully. It announced that it would do all it takes to repair the transmission mechanism of its monetary policy. At the moment, turmoil in sovereign bond markets is preventing the ECB's monetary policy from working".

"Central bank interventions", he says, "work if they impress markets. If the ECB convinces markets that it is providing a reliable safety net for solvent sovereigns which stay on the reform path, it may lure more investors back into these markets. In that case, the ECB may not have to buy many bonds".

But, if that is the Grauniad "take", the famous Handelsblatt is a little more diffident. It saw the immediate market reaction to the Draghi press conference as "excessive", but explains the rally as investors expecting, sooner or later, that the ECB will do the business.

The evidence for this, though, is slight - and the ECB is working at the fringes of its mandate, so we are talking about a belief system here. Economists surveyed by Reuters expect the ECB will conduct purchases starting in September, with the acquisition of Italian and Spanish government bonds. It will then lower its key interest rate to 0.5 percent and from the current 0.75 percent.

Nevertheless, market strategist Joerg Rahn of Marcard, Stein & Co, conceded that the markets remain volatile, "because the ECB has announced no concrete measures". In the next few weeks, he adds, there will be a lot of speculation about whether, when and what is to come.

The best Reuters can offer is that Draghi didn't fire the fabled "big bazooka", instantly to neutralise the euro crisis, but "he cocked the gun" and may yet have transformed world markets' view of euro risks".

This really is "wing and a prayer" stuff. The markets believe the ECB will do its stuff, because the markets believe the ECB will do its stuff. There is no more substance to the Friday rally than that.

Despite the fact that effluvia from politicians is increasingly unreliable and always untrustworthy, the markets want to believe that help is at hand. This has the makings of madness.

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