Market Mover: Draghi, Weidmann Talking New Crisis MeasuresJuly 27, 2012 @ 3:33 PM EST
Stocks surged to the highs of the day Friday afternoon on word that Bundesbank President Jens Weidmann and ECB President Mario Draghi will hold talks prior to next week’s ECB meeting in order to discuss new measures to combat the European sovereign debt crisis.
In short, the move in stocks appears to have been underpinned by expectations for the ECB to offer an aggressive policy response to the latest flare-up in the Eurozone sovereign debt crisis.
According to Bloomberg, Draghi’s proposals are said to include a new bond buying program aimed at reducing rates in Spain and Italy, another rate cut, as well as another new LTRO.
Wire reports also indicate that Draghi favors providing the ESM (the EU’s permanent bailout fund that is expected to go into effect this summer/fall) with a banking license in the longer term. This would allow the bailout vehicle to access financing directly from the ECB.
The U.S. stock market surged on the report of the upcoming meeting between Draghi and Weidmann. The report furthered the positive sentiment established early in the session after Germany’s Angela Merkel and France’s Francois Hollande pledged to support the euro going forward.
However, as is generally the case in these situations, an ECB spokeswoman quickly shot off an email denying that the meeting was anything special. The spokeswoman’s email said that it is common practice for Draghi and Weidmann to meet with the members of the Governing Council. She declined to comment on the content of any talks.
Yet it is also worth noting that many ECB members were reportedly surprised by Draghi's suggestion to begin a round of new bond buying, sources told the WSJ Friday afternoon.
As the news broke, the euro, as expected, shot higher but then fell victim to selling and wound up closer to the lows of the day. One argument for the action in the euro is currencies typically decline when a central bank cuts rates.
But with both the Federal Reserve and the ECB meeting next week, short-sellers may also be fearing “the bazooka” – aka a globally coordinated response by the world’s central bankers. Time will tell as next week will definitely be interesting.
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