ECB in action or ECB inaction?

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euro sovereign debt default crisis

The markets are disappointed yet again as there seems to be a lack of action on the part of the Western central banks. By the way, I would like to mention here that I am not speaking from the point of view of a trader in oil or gold futures but trying to make a point here as a participant who is looking at the pulse of the equity, bond and commodity markets and all I can say that the reaction has been of a unanimous disapproval of the actions taken so far. After the Asian markets gave a positive review to the easing monetary policies that were carried out through Japan and South Korea, it was expected that the same rhetoric would be followed by the Federal Reserve and the European Central Bank.

This, however, did not take place as first the Fed just stopped short of going through with the third round of quantitative easing and lack of guts shown by the ECB on any action on the eurozone crisis. There seems to be a strong compromise being reached between Europe’s politicians and central bankers over what the course of action should be and there is a constant give and take relationship. The markets would like to see more giving of advice and input from the policy makers in this case though.

The experts of the field should get more of a say and be given a vast, blank canvas on which they can design the policy they see appropriate and then implement it. There seems to be a positive reaction whenever the policy makers meet and the markets rally for 2 or 3 days. This effect fizzles out when the politicians meet at different summits and nullify any progress by further perpetuating a deadlock of ideas and ideologies.

The ECB announced its new policy where it offered to buy Italy and Spain’s bonds on the market using the European bailout fund for the purchase. The move would also provide liquidity to the markets directly and tougher conditions would be placed on these issues so that some sort of austerity measures can be followed. The political lack of momentum that is seen around this issue is signified by how ECB President, Mario Draghi, can only offer ideas and glimpses at the new strategy rather than giving consolidated measures to be used.

Markets and policy makers also look at opposite ends to what they want to see as the ultimate result or goal. Investors are looking for a quick solution so the markets can get out of this range bound volatility. The policy makers, on the other hand, want a more sustainable future that they can use for long term after taking into consideration the economic and political consequences of their actions. The trigger happy traders showed how anxious they are for a signal when euro jumped to $1.2405 on Draghi’s announcement only to lose it when it was clarified not as a policy measure but just an idea in the works.

The same was seen in the yields of the Italian and Spanish bonds which seem to be ever widening as the crisis drags on. The trading floors of all markets seem to be getting used to the cycle of being given a ray of hope, the markets rising for a few days and then when the reality slowly starts dawning on them, the rally subsides over time. Now it seems that they have started to get immune to any such announcements. In order to stimulate the market any further in the future, rather than saying “we would do anything to save the euro,” Draghi should carry out the actions to actually make that happen.

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