Cometh the hour, cometh the Draghi?

Mario Draghi, ECB President

The sovereign debt situation in Europe  remains at the helm of investors watch-list, in particular with the ECB meeting tomorrow. Market participants are looking for signs that the ECB has the situation under control. The “canary in the coal mine” will continue to be Spanish and Italian bond yields. If rates on Spanish and Italian debt move back above 7% the canary will begin to wobble and this will be concerning for stock markets. This not an issue at the moment with Italy’s two-year bond yield falling below 2.7 percent this week for the first time since April.

Italian 2 year bond yield chart

On Monday, Mario Draghi confirmed that purchases of short term sovereign bonds by the European Central bank would not breach European Union rules. It is expected that Mr Draghi will provide further details of a new debt-buying scheme to help deeply indebted euro zone states at tomorrows meeting. He went further on Monday stating to the Economic and Monetary Affairs Committee of the European Parliament that “if we are in the short term part of the market where bonds have a length of time maturity of up to one year, two years, or even three years, these bonds will easily expire. So there is very little monetary financing effect at all in what we are doing”.

Draghi then went on to say that the ECB’s plan would support the bank’s central role of keeping prices stable in the 17-nation euro zone, as well as safeguarding the future of the euro.

“We cannot pursue price stability now when we have a fragmented euro zone. All these developments are a way to comply with our very mandate which is maintaining price stability. And all this has to do very much with the continuing existence of the euro in a moment when the rest of the world has now started to question the existence of the euro.”

Under the plan, the ECB would buy bonds in combination with the European rescue funds to alleviate pressure on Italian and Spanish borrowing costs if the countries agreed to strict reform programmes beforehand.

There is an almost consensus expectation that central bank quantitative easing programs will intensify in the second half of this year and that it will be more co-ordinated. With multiple easing programs by a number of the key central banks, the last four months of the year could prove to be a powerful tailwind for stock markets running into the end of this year and also potentially gold

In terms of the roadmap over the next few weeks we have the following key upcoming events.

Thursday 6th – ECB post-meeting press-conference widely expected to be Draghi’s platform to unveil his Grand Plan

Wednesday 12th – (1) German constitutional court ruling; (2) Dutch elections; (3) Shape of proposed European banking union expected

Thursday 13th – Fed FOMC meeting and the possible announcement of QE3

Markets will likely be volatile around these dates so trade carefully. Other key events yet to be announced include the French 2013 budget, Troika’s Greece report (will they stay or will they go now) and Spain’s bank audit release and subsequent bailout request.