Thursday, July 26, 2012

Today's Major Market Move: Spain's Stock Market Up Over 6% in Thursday's Session

In Tuesday's post we indicated that we were expecting some type of activity to come out of the ECB in the near future. Today (a mere two days into the future), we received the following announcement from Mario Draghi, head of the ECB (quote courtesy of Bloomberg):
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said during a speech in London today. “And believe me, it will be enough.”
Sometimes words speak louder than action. Draghi's statement kicked off a fury of short covering in European equities and the main beneficiary was the Spanish stock market which gained 6.1% on the day. Here's the top 10 performing benchmark equity indexes in today's session:

Click here to go to the live table.
What we find odd is the market reaction to oil and the Euro. Oil was up a disproportionate .5% and the Euro actually strengthened 1.2% against the Dollar. Apparently the thought process being that the stabilizing effect of the ECB printing Euros to soak up PIIGS bonds is going to outweigh the inflationary impacts. If Draghi's statement carries any truth and is more than just bluster, it means that Germany has completely caved. However we would not be surprised that the country with the most detailed plans for leaving the Euro, and very well might be the first one to do so, is also Germany.

Speaking of Germany, there has been a slight rally in the short end of the Bund yield curve that actually started a few days before today's announcement. Here's the current state of German bonds where now only 2 durations have negative yields (oh, and the 3 month is at zero).

Click here to go to the live table.

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