European Closing Thoughts 02/08/12

Expectations have not been met again!!

Draghi was under pressure from investors to deliver and he failed. This is the ultimate market reaction to his press conference.

His comments in London last Thursday that the ECB would do whatever it takes within its mandate to protect the currency bloc from collapse – “and believe me, it will be enough” – had created expectations for a “definitive” action to tackle the long lasting European Crisis.

In the MidSession review we underlined the heart of his speech, and our idea was that he was trying to buy more time. Precisely Draghi indicated that any ECB intervention would start as earliest in September and would depend on countries asking for help and accepting strict conditions and supervision. (A message to the Spanish prime minister).

“The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective,”  therefore it look like the ECB would consider other “non-standard” to tackle the crisis.

“Governments must stand ready to activate the ESM/EFSF in the bond market when exceptional financial market circumstances and risks to financial stability exist,” he said. (Actual conditions are not considered exceptional enough)

With this final sentence:

“It's clear and it's known that (Germany's) Bundesbank have their reservations about the programme of buying bonds. The idea is we now have the guidance, the monetary policy committee, the risk committee and the markets committee will work on this guidance and then (we) will take a final decision and the votes will be counted.”

Draghi made clear the point: Once the Bundesbank will give its “go ahead” the “silver bullet” will be shot.

The question is will the Bundesbank give its “go ahead”??'

Markets' trust has been lost, to have a proof just have a look at the market picture:

• DJIA -1.05% to 12,835.40, SPX -1.16% to 1,359.12, Stoxx50 -3% to 2,263.36, Dax -2.20% to 6,606.09, Ftsemib -4.64% to 13,282.55, Ibex -5.16% to 6,373.40.
• Eur/$ -0.60% to 1.2152$, Gold -0.79% to 1,594.60, Oil(Wti) -1.18% to 87.86.
• Spanish government bonds yield up 6.43% to 7.165, Italian government bonds yield up 6.68% to 6.3297.

This is the result when a technocrat drive expectations that the institution he represents is unable to met. I'm sorry mr Draghi but you have failed!!!

Originally posted at www.77sigmatrading.com