Finally, Trichet Show Some Fire Power

As expected, the ECB had a pivotal role in determining spreads direction today. However, it didn’t turn out quite as smooth as the market was expecting. The  surprise followed soon after Jean-Claude Trichet‘s  press conference.

“It soon became clear that central banks were aggressively buying bonds, bringing to mind Trichet’s recent warning not to underestimate the ECB.”

Gavan Nolan


ECB president Jean-Claude Trichet did confirm that the ECB would delay its exit from its non-standard liquidity measures;  the three-month LTROs would remain in place until at least Q1 2011 and the other MROs until at least April 2011. This was welcomed by the markets, but it would have been a major surprise if wasn’t announced. The real surprise followed soon after the press conference.

The first reaction to Jean Claude Trichet‘s press conference was one of disappointment after the ECB president failed to provide a firm indication that the central bank was to step up bond purchases.

But soon it became clear that central banks were aggressively buying bonds, “bringing to mind Trichet’s recent warning not to underestimate the ECB,” credit analyst Gavan Nolan writes in Thursday’s Markit Intraday Alert.

“Portugal and Ireland government bonds were the main focus of the buying, with reports of some purchasing of Greek bonds also in circulation.” Nolan points out.

And the actions of the ECB caused the Markit iTraxx SovX Western Europe to whipsaw violently in a frenzy trading session.

The index was as tight as 182 basis points this morning, before widening sharply to 190 bp’s in the immediate aftermath of Trichet’s words.

Then rallied sharply to 180 bp’s when the scale of ECB bond buying became apparent.

“The rally in banks was even more emphatic, with the Markit iTraxx Senior Financials index reaching 145 bp’s, some 17 bp’s tighter than yesterday’s close,” Nolan reports.

Iberian banks, which have underperformance of late, were among the strongest tightening credits. This pulled the Markit iTraxx Europe tighter in a corporate market where only a few defensive names widened.

“The focus will now turn to tomorrow’s economic data, with non-farm payrolls, Markit PMIs and ISM Services,” Nolan concludes.

Adding: “But the ECB’s actions haven’t solved the sovereign debt problems, and some investors will already be wondering when the issue of solvency, rather than liquidity, will be addressed.”

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  • Markit iTraxx Europe 106.5bp (-6.5), Markit iTraxx Crossover 473.5bp (-30)
  • Markit iTraxx SovX Western Europe 180bp (-11)
  • Markit iTraxx Senior Financials 145bp (-17)
  • Sovereigns – Greece 885bp (-43), Spain 290bp (-26), Portugal 450bp (-32), Italy 214bp (-16), Ireland 550bp (-20), Belgium 182bp (-10), France 92bp (-4)

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Filed under International Econnomic Politics, National Economic Politics

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