Markets agree ‘Super Mario’ lives up to his name at least in the short term

Markets have accepted they should not “dice with Draghi’ in the short-term, by rising sharply on yesterday’s news from the European Central Bank, but longer-term they are not so convinced his grand plan to save the Eurozone will work.

Under the ECB’s program – dubbed Outright Monetary Transactions – president Mario Draghi will guide buying of bonds of burdened peripheral Eurozone states in unlimited volumes, as long as these states comply with the proposed austerity measures and have asked for central support.

the ECB plans to concentrate on buying government bonds with shorter-term durations, of one to three years, as well on longer-dated debt that has a remaining maturity of that length.

Purchases will be fully sterilized, so there will be no net increase in the money supply, Draghi explained.

Most equity markets were up by at least 2% in response. Europe’s FTSE 100 gained 2.11% yesterday, while Spain’s and Italy’s equity indices rose around 4.5% each.

By early this afternoon the Cac 40 and Dax were both still higher, by about 1%.

The followed the direction set by US markets overnight. The Dow Jones and S&P 500 indices in the US closed with 1.87% and 2.04% gains, respectively. Japan’s Nikkei 225, although closing at a neutral position on Thursday, ended Friday with 2.01% gains.

Scott Thiel, deputy CIO of fundamental fixed income for BlackRock, said: “The ECB’s announcement was – as they say in America – ‘everything and a bag of chips’, meaning that the ECB delivered effectively everything we were looking for and more.

“We are…surprised by the level of detail and directness of the statements on additional monetary policy measures.”

But others have warned the success of Draghi’s programme is not guaranteed, and further action will be required over the longer term, to ensure that the ECB achieves its goals.

Ted Scott, F&C director, global strategy, said: “The new strategy buys time, but achieving a stable and sustainable solution will require more fundamental policy decisions than what the ECB delivered yesterday.”

Johannes Müller (pictured), chief economist at Germany’s DWS Investments, adds that although taxpayers have been spared by ECB’s announcement, savers will now have “to foot the bill by accepting artificially low interest rates”.

Müller added: “It would have been the task of Eurozone politicians to fix this issue, but unfortunately [they] were not able to come up with a solution, and so the central bank had to act again.”

(His views may be mirrored in his homeland by an increasing number of frustrated voters.)

Darren Williams, AllianceBernstein’s senior European economist, also warns that Eurozone officials still have more pressing issues on their hands in periphery states, despite the bond buying initiative.

He points out capital flight from Spain has accelerated rapidly this year, reaching €220bn – a whopping 41% of the country’s annual GDP. These flows are changing the nature of Spain’s external liabilities, he says. By the middle of last year, these had reached a record €990bn, 93% of GDP.

He says “a failure by official entities in the Eurosystem to accommodate these flows would effectively terminate the currency union”.

The only way to prevent the situation from exacerbating would be to “soothe investor concerns that Spain might eventually leave the euro.”

Yet allocators are encouraged by the ECB’s announcement.

Thiel, for example, said BlackRock is maintaining its overweight positions in Spain and Italy in anticipation of an improvement. He added the manager is discussing the potential impact on risk-free rates globally.

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