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Stocks are having a mad run today, with the Dow up 270.According to Cullen Roche, the hot rumour is that the ECB is soon going to come in and forcefully drive yields lower in the periphery through massive bond buying.
We wrote about this possibility on Wednesday, when we discussed the huge selloff that day…
We talked to our friend Lorcan Roche Kelly an analyst in Ireland with Trend Macro, who knows the European debt market better than anyone else. Basically he described it as a case of the ECB refusing to blink when everyone expected them to.
So what happens next in Italy? The entire market is still waiting for the ECB to blink, and do the forceful yield suppression everyone expects. If Italy can make it through the next few days, Monday could be huge, as 50%+ chance Berlusconi is out by then, with him getting replaced by the well-respected Mario Monti. If he’s in by Monday, then the ECB might do some serious monetization. Maybe.
So everyone is frontrunning the ECB it seems, betting on a smooth transfer of power in Italy this weekend, and the ECB coming in hard on Monday.
What could possibly go wrong expecting the ECB to act?