By Michael Every of Rabobank
Yesterday saw major developments from both the ECB and the Fed. In both cases, it was sadly amateur hour.
The ECB, less than a week after saying it didn’t need a “concrete plan” for Euro fragmentation risk as it raised rates, was forced to hold an emergency meeting to provide one due to the surge in Italian yields: it said, “We will get back to you.” Their plan is a promise to come up with a plan. El-Erian was saying yesterday that the Fed risks looking like an emerging market central bank, channelling my recent DM = EM meme: and the ECB came across as a bad EM central bank. (By contrast, Brazil just hiked rate 50bps with no drama. They might want to offer lessons.)
My colleagues cover this Eurosis in more detail in ‘Pain threshold hit already?’, noting the ECB statement leaves much uncertainty over how powerful its intervention will actually be. We expect more clarity in July, and its vagueness may contain spreads for now, as the market will not want to try the ECB’s hand ahead of the formalization of any instrument. However, once an anti-fragmentation tool is known and markets will know its limitations, that arguably gives traders a new target to aim for – and they will go for it. Especially if it just says, ‘Build Back Better’.
There are lots of ways the ECB can act via acronyms. However, clearly there can be no end to ECB QE as they raise rates - as posited here was logical; or they can’t raise rates at all; and there can’t be any...