Yesterday the market originally went into freefall following news from Jean-Claude Trichet that he wouldn’t unveil a bazooka.
But then it rallied hard, after the realisation that he (well, the ECB) was back in the market aggressive buying PIIGS debt.
He HAS a mechanism to keep yields in, and just because he didn’t say anything loud, doesn’t mean he doesn’t have a big stick. According to ForexLive, he’s back in the market today, and that’s what’s pushing yields lower.
Meanwhile, Mike O’Rourke makes the argument that yes, what Trichet has available to him already is extremely powerful:
The markets’ vacation from European Sovereign debt fears was extended for a second consecutive session. European Equities were trading modestly higher as investors awaited the ECB press conference. The Euro also exhibited a level of relative calm that has not been present for some time. Spain sold €2.5 Billion 3 Year Notes at 3.72%. The bid to cover was 2.16x. That followed Portugal’s sales of €500 million of 1 Year T-Bills yesterday at 5.28%. Those are obviously high yields but considering these nations are selling anything, it is a positive. The European Government Bonds markets received confirmation of support from ECB President Jean Claude Trichet who asserted that the Securities Market Program (SMP) was ongoing and that the ECB was buying in those markets. Trichet also confirmed that ECB’s non-standard measures would remain ongoing as market conditions warrant it. The ECB has repeatedly tried to clarify that the SMP is not quantitative easing, since they follow the purchases with liquidity drains of equivalent value. We find the need to make such a distinction a little peculiar. Some market participants appear to be disappointed that it is not QE. The ECB is trying to communicate that it is acting responsibly from a price stability standpoint. From our perspective, even though the liquidity is drained, this is a far more aggressive policy than QE. The ECB is acting as buyer of last resort, whether it is the right or wrong move, it is a much bolder policy than supplying additional liquidity to the system.
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