Monday July 30, 2012 - 22:20:09 GMT
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ECB Meeting Thursday - Full Mario? (FXA)
ECB Meeting Thursday - Full Mario?
Mario Draghi’s speech in London last week will be known in central bank history as his Churchillian moment – akin to Churchill’s quote "I never worry about action, but only inaction." Or it will be known as his ‘Full Mario’ moment…naked to the world without much to show.
As a believer in most things being gray and not black or white, I would normally say be ready for some Churchill and some Full Mario. But the all in phrasing used by Draghi (within the ECB remit we will use all means necessary) lends to black or white and not gray. And we know markets are emotional in the collective sense and black or white and not gray appeal to the psychology of the crowd.
My point is that even if Draghi comes up with a quarter point rate cut, a call to study granting the ESM a banking license and some signal that SMP restart is in the works for a later date as is further LTRO’s should they be needed, will not be enough to keep the risk on trade he set in motion last week. Indeed he painted himself into a corner and it is hard to see any other market conclusion than the ‘Full Mario.’
The FT Sunday was quick to report that German members (and others) of the ECB Governing Council had not even been consulted ahead of the Draghi pep rally. Moreover there were reports last week that the German government backed the position of the ECB only to learn again in the FT that this is not the case based on Finance Minister Schaeuble’s reaction.
Unless Draghi can pull off a come to Mario moment in a meeting with Buba President Weidmann I just can’t see a consensus of the ECB GC backing Super Mario. A loose cannon comes to mind – or even better loose lips sink ships. The SS EURO could be leaking like the Titanic on Thursday unless Mario delivers.
Granted the ECB GC runs on a majority vote and Draghi with the periphery may have enough votes to get what he wants (23 voting members – 6 from the Executive Board and 17 national central bank heads) the ECB is run like the Fed in practice – consensus matters.
So what is the market looking for Thursday? Since I could pose the same question to the core members of the Governing Council, it is hard to know. But as I suggested earlier I think the markets expect Churchill – delivers the goods with SMP locked and loaded, quarter point cut in the refinance rate and LTRO dangled out there as policy response in the waiting. I don’t think the market has the patience for some indeterminate start-up date for SMP and a vague suggestion LTRO could be dragged out later.
And if that were all we needed to put into the calculus that would be one thing. But the Fed meets Tuesday-Wednesday and what it does could influence what the ECB does or does not do. If 2008 is anything like 2012 then look for the Fed to carry the water of policy accommodation for the ECB. But I think the Fed is making it clear – this is a European crisis demanding a European (ECB) response. And moving ahead of the ECB, when a crisis dive into the financial and economic abyss can come at any moment, is foolish. It is not the presidential election the Fed is worried about, it is having an empty cupboard after EZ implodes.
Lastly, I can’t help but think the ECB will remain opposed to QE or monetization – not in the ECB remit. And there are few on the ECB GC who would ever concede to making the ESM a bank – unlimited access to ECB reserves via future MRO’s and LTRO’s or QE by any other name.
I think MRE’s (meals ready to eat) and helmets are mandatory for Thursday…beware of risk on, prepare for risk off as we see markets fall out on the Full Mario side.
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