By Greg Peel
The Dow rose 244 points or 1.9% while the S&P gained 2.0% to 1432 and the Nasdaq jumped 2.2%.
In July, ECB president Mario Draghi said he would do "whatever it takes" and thus sparked the rally that took us back to the May four-year highs on Wall Street. Last night, Draghi left the ECB cash rate on hold at 0.75%, left the bank deposit rate unchanged at 0%, but said the central bank will buy "unlimited" amounts of short-dated sovereign bonds of distressed eurozone members up to three-year maturities. The purchases will be "sterilised" by selling equivalent amounts of euro Treasury bills (6-12 month maturity).
Wall Street's response was to send the S&P 500 back through the May 2012 high and up to the level of May 2008. The Dow has also taken out the May 2012 high to match a level last seen in late 2007, while the Nasdaq is close to 12-year highs, taking its level back to those of the pre tech-wreck era. Volumes were about 10% higher than the recent average. Short-covering was clearly evident.
Yet what we got from Draghi was still just talk, not action. There were no surprises ? the rumour mill has built to this point over the past month and ultimately been accurate. The ECB will buy bonds in the secondary market and those purchases will not be ranked above existing bondholders, as earlier Greek purchases were. The European Stability Mechanism will buy bonds in the primary market. No bonds will be bought unless the member in question asks for a bail-out, which will come with strict conditions. Given the purchases will be sterilised, there remains a level of disappointment that this is more of an "Operation Twist" than a "QE".
We are reminded that Italy has insisted it won't need a bail-out, and Spain has not yet asked for one. Despite half the states of Spain having themselves asked for bail-outs from Madrid, the Spanish government will not stick its hand out to the ECB if it thinks the required austerity package is too overwhelming. The ESM will not be able to buy bonds in the primary market if it is not allowed to exist, with a ruling from the German court due on September 12. The Bundesbank voted against any ECB bond purchases and we may see a resignation soon.
What we have is a more clarified, but still to be ratified, safety net. Not a plan to fix the eurozone. Meanwhile, the two US presidential candidates argue about how to fix the US economy, while Wall Street fears the "fiscal cliff" as the biggest obstacle ahead.
Last night it was revealed that new jobless claims in the US fell 12,000 to 365,000 and the ADP private sector report showed 201,000 new jobs being created in August. That's the largest jump in five months. Economists now expect tonight's non-farm payroll numbers to show an addition of 120-150,000 jobs, which would be considered a good result. However it has been previously suggested 200,000 new jobs are required each month to make an impact on the unemployment rate, and economists expect that rate to remain at 8.3% tonight.
If the jobs result is "good", where does that leave the Fed? Given one jobs number, no matter how good, is not enough to call a "substantial and sustainable" economic improvement, those believing the Fed is destined to announce some form of QE3 next week don't think the jobs result will matter. The other side of the argument is based largely on an anticipated Fed reluctance to announce a major policy change just before an election that could bring about major fiscal changes. Not to mention the Congressional wrangling that will need to occur ahead of the year-end budget deadline.
European stock markets were off to the races last night, with London up 2%, Germany and France up 3%, Italy up 4% and Spain up 5%. The reaction in other markets was otherwise comparatively muted.
The euro rose, but only enough to send the US dollar index down 0.1% to 81.11. Gold shuffled up another US$7.20 to conquer 1700, at US$1700.30/oz. The Aussie has jumped 0.8% to US$1.0281, but a lot of that move is due to yesterday' surprise local unemployment numbers.
Base metals made their move on the rumour on Wednesday night, so they didn't really do much at all. Ditto oil, with Brent down US20c to US$113.00/bbl and West Texas down US48c to S$94.88/bbl.
The US ten-year bond yield shot up 8 basis points to 1.67%, which is arguably based on the "risk off" implications from the ECB, or a good jobs number keeping the Fed at bay, or both. Our old friend the VIX, for what it's worth, fell 12% to 15.6, but given it has hardly risen above 20 these past months, it doesn't mean much (other than put protection is cheap and that's worth looking at as we rally higher).
After a better than expected performance in the physical market yesterday, the SPI Overnight is up 52 points or 1.2%.
So it's US jobs tonight, and then we move on to the German court ruling and Fed meeting next week. Ahead of that we'll see Australia's July trade balance today and an August data dump from China over the weekend.