‘Whatever It Takes.’ Again. Again.

‘Whatever It Takes.’ Again. Again.

Global equities pressed higher, buoyed by earnings and the prospect (or is it just a “promise” now?) of perpetual stimulus both monetary and fiscal.

US shares were generally mixed following results from Amazon and Google. The dollar, which was attempting a comeback to the chagrin of risk, stalled, but it should be on the watch list.

After suffering another one of its regularly scheduled crises of government, Italy just decided to let Mario Draghi do it. He’s poised to become prime minister, which is obviously a market-friendly outcome. This is yet another nod to the desirability of reverting to pre-insanity “norms.” Now, the world has Janet Yellen running the show for US markets and, assuming the “deal” gets done, Draghi running Italy. Italian financials surged.

Needless to say, Italian bonds rallied too. 10-year yields dropped to within shouting distance of record lows, and the BTP-bund spread compressed to the tightest in more than four years.

“The yield on 10-year BTPs has the potential to slide to 0.36%, about 20 basis points lower than current levels, if Draghi gains a majority,” Bloomberg’s Ven Ram wrote. “In turn, that means the BTP-bund spread may narrow to as little as 83 basis points from ~104 basis points,” he added, before cautioning that Draghi “may find it challenging to win a majority… given the fractious positioning of the various political parties,” while the rally in BTPs also depends in part on whether any steepening bias in the global rates complex gathers steam and proves sustainable.

It’s safe to say markets and analysts will be thrilled about this. Indeed, some of the commentary on Wednesday reflected that. Danske’s Piet Christiansen called Super Mario a “gettin’ things done kinda of guy,” for example. Over at Mizuho, they called Draghi a “major confidence boost for foreign investors.”

When you consider this with the fact that Christine Lagarde and the ECB are targeting spread levels, you’ve got a setup that’s not dissimilar from that in the US with Yellen at Treasury. Mr. “Whatever It Takes” — Europe’s own “Maestro” — would lead Europe’s problem child, and it’s probably not a stretch to say that bond yields there will now be almost totally administered by the ECB. Unless you want to suggest that Lagarde won’t be inclined to take “advice” from Draghi about… well, about anything and everything probably, including how to manage monetary policy in the latter stages of the pandemic.

Meanwhile, European inflation followed German prices sharply higher in January, but distortions abound. Between tax cuts rolling off and base effects, the ECB will look right through the optically “hot” prints.

Europe is on the brink of a double-dip recession, although GDP numbers for the fourth quarter were slightly better than expected.

There’s no chance that policymakers are going to read anything into January’s inflation numbers. It’s a free pass to celebrate the upturn while simultaneously dismissing it as meaningless in the event anyone dares to even mention policy normalization.

But hey, at this point, it doesn’t matter. The world is saved anew. Draghi is back. Europe is pulling a Tugg Speedman.

In 2012, when the eurozone came to a halt, the world called on the one man who could make a difference. When it happened again, the world called on him once more. And no one saw it coming three more times! Now, the one man who made a difference five times before, is about to make a difference again. Only this time, it’s different.


 

2 thoughts on “‘Whatever It Takes.’ Again. Again.

    1. John, you missed the sarcasm hints (e.g. Tugg Speedman, making a difference five times before). The same old leadership hasn’t fixed the macro dynamics, only slowed the decay. Will Draghi turbocharge Italian exports?

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