Kass: Olympic Sabre Rattling
NEW YORK ( Real Money ) --
A lot of people don't like fencing because they don't understand the rules and terminology, but it's quite simple. Basically, there are four thrusts -- the cartilage, the chaise longue, the aubergine and the fromage anglaise -- and these in turn can be parried by four defensive feints -- the pastiche, the penchant, the demitasse, and the salmon en croute. Scoring is on the basis of one point for a petite pois and two for a baguette. Points equally can be deducted for a foot fault, or pied a terre, and for a type of illegal lunge known as a zut alors. Actually, I don't have the faintest notion what goes on in fencing, but that's OK because this is the Olympics.
-- Bill Bryson in The Times (2000)
Similar to fencing, it's sometimes hard to figure out the equity market, particularly with regard to its near-term price action.
What we do know is that from Wednesday to Friday the U.S. stock market put in an Olympic effort.
The proximate cause was the sabre rattling and jawboning of the ECB's Mario Draghi.
Moral suasion is a well-known ritual, but as I contended late Friday (while Draghi's rhetoric had more volume than usual last week), a lot of heavy lifting remains ahead, especially within the context of the numerous challenges facing Italy and Spain in their quest for economic growth and in their much-needed debt financings.
Niles (David Hyde Pierce, commenting on his brother's new housekeeper Daphne) : Why did you have to hire Venus herself? Couldn't you have found some beefy, East European scrub woman who reeked of ammonia?
Frasier (Kelsey Grammer) : Well, I asked, but it was an Olympic year. The agency was fresh out.
-- "Frasier," My Coffee With Niles (1994)
Draghi must now convince the ECB council members, especially the Bundesbank. Will Germany cooperate with the poor periphery nations, or, as the lynx-eyed Mark Grant suggests (hat tip Zero Hedge ), will "Snow White dump Prince Charming?"
Time will tell.
What we do know is that it is unclear how quickly the EFSF can actually buy the sovereign debt of Italy and Spain, as both countries still have to apply for support.
As to Thursday's ECB meeting I expect little news -- just a reemphasis of the set of policy tools available.
The real issue that could adversely impact the markets is how quickly Draghi can and will respond if sovereign debt yields resume their ascent. If markets deteriorate, and the ECB doesn't move swiftly, Draghi (et al.) will lose their credibility and ability to persuade the markets solely through words (and not by deeds of a sustained policy approach).