The European Central Bank indicated on Thursday (2nd. August) it may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs but the conditions it set and the dissenting voice of its key German member disappointed markets.
In the latest move to contain the eurozone crisis, ECB President Mario Draghi indicated that any intervention would not come before September - and only if governments activated the euro zone's bail-out funds to join the ECB in buying bonds.
"The Governing Council ... may undertake outright open market operations of a size adequate to reach its objective," Draghi told a news conference after the central bank's monthly meeting, using the central bank's code for bond-buying.
The ECB kept euro zone interest rates at a record low 0.75 percent but Draghi said the council did consider a further rate cut on Thursday amid signs that an economic recession in peripheral European countries is spreading across the continent.
A Reuters poll of nearly 50 economists after Draghi spoke found that most expect the ECB to start buying Italian and Spanish bonds in September and to cut rates t o 0.50 percent.
Draghi was under intense pressure from investors, European leaders and the United States to deliver on a pledge he made last week to do whatever it takes to preserve the euro by bringing high borrowing costs down.
But shares and the euro fell after the ECB chief's remarks, and Spanish and Italian bond yields jumped, with Spain's 10-year paper vaulting over the 7 percent danger level.
"It is quite disappointing ... There is a lack of any action so he has basically passed the buck back on to politicians," said Ian Smith, strategist at Knight Capital.
So reported Reuters in Frankfurt yesterday. Since last Monday the ECB had hinted that on Thursday Mario Draghi would announce a "game changing" initiative. However his presentation to the press turned out to be a "non-press" conference. No new initiatives were propounded.
On the contrary Draghi intimated that Italy would probably need to avail of a bailout in addition to Spain. Thus the European Stability Fund (ESF) which is supposed to be the great savior of Euro sovereign debt will be 40% "secured" by countries availing of bailouts. Four Euros out of every ten are the ESF contributions to be made by Greece, Portugal, Ireland Cyprus, Spain and Italy. Thus the "Bailout Fund" is in large part being bailed into by those countries actually bankrupt. Talk about the blind leading the blind.
When will this farce end my American colleagues ask? Things have got so bad that two weeks ago the IMF reported that they would no longer contribute to any more ECB bailouts unless radical measures are taken to address the structural problems in the Eurozone. Draghi's presentation on Thursday was in part as a result of this American pressure however, his response was far less than what was expected and accordingly the Euro "crisis" is back on centre stage once again.
Today, Friday, Ireland's most influential newspaper; the Irish Times, had its main economics editor Dan O'Brien reporting that he has raised his probability of a breakup of the Euro from 15% to over 50%. This is mainstream media not some off-world blog. Such articles would not be appearing in premier publications unless the Irish establishment was actually preparing for the possible demise of the Euro.
Across the Irish airwaves other economists were picking up on Mr. O'Brien's comments. They too reckoned the Euro would fall and soon. Jim Power, one of the top economists with an Irish bank, pointed out that the European "model" had failed. He believed like the Irish Times journalist that Germany was walking away from Europe and was deciding to tie in its lot with Poland, Russia and the East rather than the West. Strange times indeed.
Dow Theory Schizophrenia
I have been teaching stock market investment now for over two decades. One of the first modules I present in my course is called "understanding the markets". The main conceptual paradigm I use in this exercise is Dow Theory coupled with Advance/Decline Line (ADL) analysis. In all my time monitoring and teaching Dow Theory I have never experienced such "schizophrenic" technical signals as those charted over the last 4 months.
I am not alone. At the end of April most Dow Theory commentators read a classic Dow bear market sell signal in the technical picture. The Dow 20 Transports had failed to break new highs set by the Dow Industrial 30 and then both indices broke below previous lows. This Dow bear trend had been forewarned by the ADL on the 16th April when the Dow Transports daily moving average (DMA) broke below the 50 DMA. However despite this "sell" signal, markets rallied and the 20 DMA on the ADL broke above the 50 DMA on July 5th. Thus in summary the bulls were killed in April and the bears were slaughtered June/July Thus Dow Theory is not giving the reliable technical signals it is historically renowned for.