There were no refills of the punchbowl from the US Federal Reserve, the Bank of England and then, last night our time, the European Central Bank.
That disappointed markets which thought they were on a promise after ECB head Mario Draghi’s comments last week that he would defend the euro. Now markets have nowhere to go but sideways or down while they await the next straw to grasp onto and hope. The ECB left its key interest rate steady at 0.75%, despite acknowledging no improvement in the health of the eurozone economy and markets.
“The euro is irreversible,” Draghi told a press conference. “It stays … It is pointless to bet against the euro. It is pointless to go short on the euro.”
The lack of any move from the ECB — especially no banking licence for the European Stability Mechanism (which would have allowed it to borrow from the central bank to support bonds issued by countries like Spain and Italy) — reversed last week’s confidence boost from Draghi. Other commentators claimed that nothing would happen until next month when the German Constitutional Court reveals its vote on whether the Stability Mechanism is legal.
Until then Draghi’s hands are tied. But later reports said the ECB will do something in the near future, so long as the governments of the eurozone agree and start the process. Getting Spain, Italy and other broken countries to financially support bond buying — mostly of Spanish and Italian debt — seems illogical, but so very European.
Draghi did indicate the central might intervene, but that would not come before September (markets want it now) — and only if governments activated the eurozone’s bailout funds to join the ECB in buying bonds. Given Germany is opposed, that seems unlikely. “The Governing Council … may undertake outright open market operations of a size adequate to reach its objective,” he told a news conference after the central bank’s monthly meeting, using the central bank’s code for bond-buying.
Markets tanked on hearing those words — 5% down in Spain as Draghi was talking at a press conference. The Italian market fell by more than 4%. Other European markets reversed gains and suffered sharp losses on the day. Wall Street opened lower and wandered through the day in the red. Yields on 10-year US Treasury bonds fell to 1.499% after Draghi started speaking, from 1.568%, and they stayed low, closing at 1.48%. The euro fell against other major currencies; oil and gold weakened.
The Spanish and Italian governments ignored the markets and rejected the need for a bailout. With Spanish bond yields climbing back over 7% and Italian yields jumping, Spanish Prime Minister Mariano Rajoy told a joint news conference in Madrid with Italian PM Mario Monti that their “two countries want to work together” to get through the debilitating crisis.
The real question is not whether any further help from central banks for markets can steady the ship — it will, even if it’s only to calm flighty investors. The more pressing problem is what to do about the bad dose of factory flu infecting manufacturing across the globe. That’s looking very contagious and an emerging danger to countries well away from the eurozone, even in Australia and New Zealand.
The cause of the flu is a combination of the deepening European slowdown, the weakening forecasts for sales and profits from some of the world’s biggest companies in the US, Japan, China and Europe, and the knock-on effect that now seems to be having on demand generally for cars, machinery, chemicals, computers and IT and a host of other products. That in turn is rattling commodity markets, especially iron ore, coal, oil and nickel, tin, lead and zinc prices.
That’s why the more important of the statements issued by the world’s major central banks this week emerged in Beijing yesterday afternoon. China, the biggest consumer of our raw materials, seems to be increasingly worried about the strength of its economy, which is still growing but at a slowing pace. In its latest quarterly monetary policy report, the People’s Bank of China was quoted by the official Xinhua news agency saying it will make “stabilising economic growth” a bigger priority.
In the report, the central bank repeated its now standard formulation that it would balance the three objectives of maintaining steady and relatively fast growth, adjusting the economic structure and managing inflation expectations. But it added new language on growth, saying it would “put stabilising growth in a more important position”. Economists in Beijing say the change signals that it sees the slowdown as the biggest risk to the Chinese economy, and that it may take further measures to boost growth.
It echoes recent comments by China’s top political leadership, including President Hu Jintao. But it is new for the central bank, having not appeared in the previous quarter’s monetary policy report. Xinhua reported: “Following the government’s decision to prioritize stable growth, the People’s Bank of China (PBOC) will continue to implement the prudent monetary policy and make the policy more future-focused, targeted and flexible”.
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