Great points this morning from Deutsche Bank’s top credit strategist Jim Reid on what the future holds.Quite simply, it’s all about the ECB.
As we peer into next year, 2012 is continuing to look to us like a year that will be decided by whether the ECB is a very different institution to what it is today. Indeed 2012 could be one of those years that will always stand out in the history books, especially if the ECB decides against inking up the presses. However these events take time to unfold and in the near term the market will be focused on the resignation of Silvio Berlusconi, the appointment of Mario Monti, the passage of Italy’s Financial Stability Law, and also the new leadership in Greece. The stabilisation of this fragile situation has been crucial given today’s Italian bond auction at 10am London time. The government is looking to sell up to EU3bn in Sept-2016 bonds after a Friday BTP rally that saw the 10yr yield fall by 44bps to 6.417% or around 100bps below the highs of last week. The hope towards the end of last week was that a change of Government would prompt a more aggressive ECB. The SMP program likely stepped up on Thursday/Friday but the evidence for this will have to wait until next week as today’s SMP weekly stats only cover bonds bought up to Tuesday given the standard T+3 settlement period.
This is really it. It’s hard to imagine the markets will be satisfied until that full-on ECB backstop/printing press comes.
But there’s just no guarantee it will happen.
Large-scale QE remains a high hurdle which goes against the DNA of an institution that takes pride in achieving price stability over the last 13 years. Indeed Bundesbank President Jens Weidmann’s interview with the FT overnight gave us some interesting insights on this. He stressed the importance of maintaining the independence of the ECB and its fundamental mandate of delivering price stability. Calling the discussion of monetising Italian sovereign “absurd”, he pushed back fiscal responsibility back to governments and highlighted that the ECB must not be a lender of last resort as this would violate Article 123 of the EU Treaty. On the EFSF, Weidmann thinks that the rescue fund has the resources to deal with the problems. This debate over the ECB’s future will run and run and as we said above will likely dictate whether 2012 will be a year of a closer Europe or a disintegrating one.