Thursday, September 06, 2012

Draghi Lives Up To His "Whatever It Takes" Comment

Markets are sharply higher in early trading on the heels of some good economic data combined with comments out of the ECB that support Mario Draghi's recent statement that he will do "whatever it takes" to save the euro.

The ECB will commit to buying unlimited amounts of sterilized bonds, acting strictly within its mandate and focusing on bonds with maturities of less than three years.  Countries will still need to first make a formal request for aid first.  But global markets are pleased with this commitment, and markets from Asian to Europe are rallying.

The ECB held its benchmark rate at 0.75%, the Bank of England stayed at 0.5%, but in a surprise move Sweden's central bank cut their key interest rate by 25 basis points to 1.25%.  Separately, the Eurozone Q2 GDP report showed a contraction of -0.2%.  It remains unclear what the eurozone will be able to do to spur growth in the region in the face of much belt tightening and austerity measures.

In the US, the August ISM services index rose to 53.7 from 52.6 last month.  Also, the ADP employment report showed that private payrolls rose by 201k in August, well above expectations for 143k.  In addition last months figures were revised higher from 163k to 173k.  This comes ahead of tomorrow's govt. payrolls report, but the ADP report has not always been a good forecaster of that report.  Current consensus estimates for tomorrow's figures are for 130,000 new jobs.

The euro was lower in early trading after the ECB announcement but has since moved back into positive territory vs. the dollar.  Commodities are higher with gold trading up to $1710 and oil prices higher near $97.15.  Silver prices are also higher as well as copper prices.

The 10-year yield is getting a nice boost to 1.68%.  And the VIX is getting crushed, down -9.5% almost back to the 16.0 level.  Recall that a month ago the VIX got down to 13.45.

Trading comment: The other day I commented that I could easily see the markets breaking out in the near term before any sort of pullback.  That prediction is coming to fruition today as the S&P 500 breaks out to a new high for the year.  At current levels, the SPX is also at a 4 1/2 year high and back to levels we haven't seen since May 2008.  I still think a lot of this price action in the market comes from a combination of the world being awash in liquidity and looking for a home to invest with interest rates near 0%.  Also, I think a lot of portfolio managers continue to underperform their benchmarks and so they are forced to put money to work and scramble to keep up as the market continues to move higher and not offer a good pullback to allow them a better entry point.


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