I awoke to this news, via the Wall Street Journal:
Italian two-year and five-year government-bond yields soared to euro-era highs Friday as investors began giving up on the euro zone’s ability to break the political gridlock that is blocking a more decisive response to the currency bloc’s debt crisis.
Italian two-year and five-year yields climbed to 7.7% and 7.8%, respectively, and the 10-year yield moved further above the key 7% mark to 7.3%.
This just a day after an apparently not-confidence boosting meeting of the leaders of Germany, France and Italy. Perhaps European policymakers need fewer summits, not more?
Contrary to conventional wisdom, Ralph Atkins at the Financial Times views yesterday’s European commitment to back off the ECB as a positive development:
My reaction on hearing that Mr Sarkozy had agreed to keep silent was that it would actually increase the ECB’s room for manoeuvre. Fiercely independent, the Frankfurt-based institution would have hated any suggestion it was reacting to pressure from Paris. Now, any steps it took would clearly be at its own initiative.
I am sympathetic to this line of reasoning. That said, Atkins gets to the next problem:
Of course, this does not mean the ECB will act. Mario Draghi, new ECB president, sees governments as responsible for resolving the crisis and the central bank as having a limited role. He worries about putting ECB credibility at stake.
Yes, if European Central Bank President Mario Draghi has more room to act, he apparently isn’t using it. The ECB’s forays into the bond markets appear to be increasingly futile. Via the Financial Times, the ECB is in the market again today:
The European Central Bank again bought Italian and Spanish debt on Friday but analysts have complained that its purchases are no longer sufficient to stem a wave of selling. Yields on the 2-5 year range for Italy were 7.67-7.77 per cent in late Friday trading.
Despite the mess in Europe, hope springs eternal on Wall Street. The early news from Bloomberg:
U.S. stocks rose, snapping a six-day drop in the Standard & Poor’s 500 Index, as speculation European leaders will do more to fight the debt crisis overshadowed concern about higher borrowing costs in the region.
I think it is dangerous to attribute too much day-to-day noise to news flow. Still, if this is anywhere near accurate, whoever is left on Wall Street today must still be groggy from Thanksgiving feasting. Zero Hedge attributes the morning rally to hopes the Swiss National Bank will act to support the Euro. In any event, the momentum looks to be fading in the late-morning as reality sets in.
Bottom Line: Europe is quickly moving from bad to worse. To be sure, we should anticipate a rally will follow the eventual ECB capitulation on quantitative easing, but that will only be half the battle. The ECB will only capitulate in return for massive, sustained austerity. It is too late for an easy end to this story.