Fallout from Draghi: Do What is Necessary but Not Yet

Many observers seem dumbfounded by the lack of action to support official claims to do what is necessary.  The market's reaction has been swift.  European stocks reversed course.  Spanish stocks are off almost 4%, led by a 5% drop in financials.  Spain's (generic) 10-year bond yield is back above 7%.  

The fact that Draghi suggested that if the ECB bought bonds it would target the short-end, which falls within the classic policy instruments (seemingly in response to German objections), may be helping the short-end hang in better. 

Previous support for the euro, around $1.2225-30 is now offering resistance.  Sterling is holding on to minor gains against the dollar and is posting a stronger recovery against the euro, against which it had fallen to 3-week lows prior to the ECB meeting.  Resistance though is now seen in the $1.5570 area. 

Australia, which reported stronger retail sales and an unexpected trade surplus has been quite resilient to the risk off post-ECB shift.  It fell about 1.25 cents from the session high, but is rebounding smartly to resurface above $1.05.  With fading hopes of a rate cut next week, the Aussie's yield appears the greater source of attraction. 

European officials do not seem to appreciate the significance of disappointing the market to the extent it has don so today.  Surely,  promises to do what ever is necessary  led to expectations that officials had no intention to meet in the kind of time frame that their audience and investors reasonably expected.  Draghi's promise to "design appropriate modalities for such policy measures" should have been done since the June 28 summit.  Even given the large reversals in the markets, it appears that Draghi's gravitas will suffer the greater loss from today's inaction. 

No doubt Draghi's hands were tied.  We return to a point we have made in the past.  A key difference between the ECB and the Fed is not the mandates, especially given the modern interpretation.  It is not the focus on core or headline inflation.  The rhetoric here too is greater than the substantive difference.  Rather the key difference is that the Fed is governed by a core board of governor.  The regional presidents rotate on and off but hold a minority of votes at the FOMC.  The ECB has a much smaller board of governors and the regional presidents are a majority.