Home > Uncategorized > 2012/04/04: Quick Post: ECB press conference interesting with key question unasked

2012/04/04: Quick Post: ECB press conference interesting with key question unasked

© 2012 ROHR International, Inc. All International rights reserved.

Just as with his predecessor J. C. Trichet, ECB President Draghi’s post-rate decision press conferences are always interesting affairs. And possibly even more so under his regime, due to his leaning toward far more accommodation than anything Monsieur Trichet would have ever allowed. And that left a key question unanswered today, because it went unasked.

Yet, along the way there was quite a bit of interesting insight. ECB vice president Vitor Constâncio explained the degree to which €50 billion of rescue funds were likely enough to recapitalize and reorganize ailing Greek banks. That was certainly a constructive bit of insight.

There was also the reconfirmation that the current European Social Model is dead. Signore Draghi was quick to point out that this only meant the current form of it, and not Europe’s overall commitment to social efforts. (More on that below.)

However, one of the most interesting exchanges of the Q&A after the formal statement was (typically) from Ralph Atkinson of the Financial Times. The original question was not specifically on the topic of quantitative easing (QE.) Yet, the ECB President launched into an explanation of why its extended operations were NOT a form of QE. And that is where (in our humble opinion) the most interesting question went unasked…

…as to the quality of the collateral the ECB was accepting in return for the funds banks are provided under its aggressive Long Term Refinancing Operation (LTRO.) Certainly President Draghi is technically correct that the ECB is not involved in outright purchases of government bonds; and therefore not involved in QE in the way that (as he put it) “some other central banks” are proceeding. And he rightfully noted there was interest being charged on those LTRO loans. That ostensibly makes it a normal central bank operation, even if writ large.

Yet, there was no question as to the quality of the collateral the ECB is accepting for those loans. And that is a key factor in whether the loans are indeed normal central bank operations, or a de facto form of QE being funneled through the banks. We surmise that the assembled members of the financial fourth estate were cautionary about debating the quality of the collateral in a general forum like the press conference.

However, that none of them even bothered to ask leaves the entire area less than well scrutinized. We had joked a while back that the ECB was excepting anything down to gum wrappers to ensure banks had plenty of liquidity. Shortly after that none other than ex-ECB member Juergen Stark made a similar reference.

As long as the banks continue to avoid any near-term problems, that entire issue might be less than critical. However, with Spanish government bond yields on the rise again of late, the whole issue of the quality and value of the ECB balance sheet may soon be back under scrutiny. And that is one of the key areas we discussed as a potential economic and equity market problem in yesterday’s Just Do It vs. Triple-E post on the still considerable tail risks. In this case the Triple-E is for Energy, Earnings and… Europe.

There were some problems from this press conference on other fronts as well. Having just provided so much liquidity to banks, Signore Draghi was somewhat less accommodative in general. He was clear that while the ECB could provide liquidity, bank capital was an entirely different matter. And there is little it can do on that front.

And regarding the idea that “this” European Social Model is dead, he had some very interesting and rightful observations. The foundation is that many of the weaker economies are in trouble because they are not competitive. Yet, rather than ask the best performers to drive more domestic demand, the under performers need to reform; especially in the area of their labor market regulations.

He used his answer to a specific question regarding youth unemployment in Spain (which applies generally across the Euro-zone) to expand upon that point. He noted that protection of senior workers’ rights and privileges led to the creation of a “dual labor market” in Europe. While the lower barriers to hiring and firing younger workers were helpful for time, once the economy slipped they were the first to be fired. And with a lack of labor demand along with protections for senior workers, they have not been rehired.

All of which is very interesting, and excellent theory. The problem becomes how any of the governments and companies in the less competitive countries can get the senior workers to give up pay levels and privileges. And while these reforms will undoubtedly help in the long run, they are not directly related to current market concerns about escalating Spanish borrowing costs.

In a week where equities were expecting quite a bit of continued accommodation from central banks, it seems that both the Fed and the ECB failed to provide the requisite comfort. Now it will be very interesting to see how the current selloff in equities plays out.

General Market Observations

Much the same as noted yesterday, June S&P 500 future had chopped around 1,400-07 resistance, which we cautioned before the market reached it was an interim (i.e. not major) area. No surprise that after sagging below it intraday last Thursday, it did not Close last week below the previous Friday’s 1394.10 weekly Close. That is important, because it was a window of opportunity for the bears to reverse the current resilient up trend.

Failing to do so left the market in good shape from last Thursday’s Close into early this week. And it is most interesting that the market has dropped right back below 1,394 today. It remains an interesting support this side of more major support down in the 1,375-67 range (major resistance violated on the way up three weeks ago.)

Whether it can put in a daily Close below it this week is also going to be a very interesting indication. And European headwinds will still be well worth watching now that DAX failed to hold its recent push back above 7,000, and is approaching its important interim 6,750-25 support. Similarly from yesterday the FTSE was already slipping back below 5,860, and is vigorously challenging its 5,780-46 lower support (in fact already trading below it at this moment.) That is important, because the next significant lower support is not until the 5,600 area.

It is all putting additional decision emphasis on the US upside leader’s ability to hold and recover late this week. Of course, that all becomes much more of a problematic decision for the rest of the Western world that is closed for Good Friday while the US (fools) insist on releasing the monthly Employment report. And that is into an abbreviated fixed income and foreign exchange derivatives trading session (even the New York Stock Exchange is closed for the holiday.) It’s going to be interesting.


Those are all still very much the same as yesterday’s post.

Thanks for your interest.

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