Wednesday, 06 June 2018 23:20

"The ECB Is Basically Giving The Finger To Italy": Is Draghi Risking Everything To Teach Rome A Lesson

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Perhaps the most perplexing market-moving event of the past 48 hours, was the 1-2 punch of a Tuesday Bloomberg report that next Thursday's ECB meeting is "live" in that policy makers anticipate (at long last) holding a discussion that could conclude with a public announcement on when they intend to cease asset purchases (QE), coupled with a slew of ECB members overnight coming out with unexpectedly hawkish comments.

Of these, the ECB's otherwise dovish Peter Praet said inflation expectations are increasingly consistent with the ECB's aim, and added that markets are expecting an end of QE at end of 2018, this is an observation and input that is up for discussion and that "it's  clear that next week the Governing Council will have to make this assessment, the assessment on whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases."

Other ECB hawks such Hanson, Weidmann and Knot doubled down on the central bank's sudden QE-ending jawboning pivot, saying that the ECB could lift rates before mid-2019 due to "moderately" rising inflation, that market expectation of end of QE by end of 2018 is plausible, and that the ECB should wind down QE as soon as possible.

The market response was instant, and it not only pushed both German and Italian yields sharply higher...

... as well those of US Treasurys, but spiked the EUR while sending the USD lower, and unleashing today's euphoric stock surge.

Now, it is hardly rocket surgery that without ECB support, Italian bonds are toast. After all, as we have shown and predicted since last December, without the only marginal buyer of Italian debt for the past 2 years - the ECB - Italian yields would soar, leading to a prompt default by the nation which would suddenly find itself drowning under untenable interest expense.


This was indirectly confirmed earlier this week, when the ECB admitted that, for whatever stated reason, it had purchased a far smaller share of Italian bonds than normal. In fact, in May the ECB bought the smallest relative percentage of Italian debt since the launch of QE...

... while boosting its Bund purchases.

Needless to say, the Italians, especially the ruling populist coalition, were furious and claimed that Draghi was directly "manipulating" the market to slam Italian bonds and hurt public sentiment just as the coalition was being formed and threatened to place a Euroskeptic finance minister, something EU budget commissioner scandalously suggested last week when he said that "the negative development of the markets will lead Italians not to vote much longer for the populists", a terrible statement for which he promptly apologized as it was... the truth, and revealed that fundamentally the ECB is very much a political entity, and one which got Silvio Berlusconi fired in November 2011 in...

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