Elusive Draghi set to keep us waiting

PREDICTING what central bankers will say, when they will say it – or even whether they will show up to deliver a speech – is becoming an inane pursuit. The banker in question is the elusive Mario Draghi, president of the European Central Bank (ECB), who was to deliver a speech at the European Parliament yesterday. He cancelled earlier in the day.

According to some sources, this was apparently due to the ECB having a quiet week before the governing council meeting on 6 September. This is difficult to swallow, especially after Draghi also wiggled-out of his appearance at Jackson Hole Symposium last week. On that occasion, the official reason was due to the “heavy workload” that he foresaw in the days before the upcoming ECB policy meeting.

With the Eurozone to feature heavily in September, what should traders read into this? Could it suggest further disappointment ahead?

Simon Smith, chief economist at FxPro, cools this talk: “Sometimes you can read too much into things. When you are trying to reconcile the opinions of 17 countries, it is a lot of work – especially if they aren’t singing from the same hymn sheet. There aren’t any magic bullets: if there were, someone would have fired them by now.”

Perhaps it is market expectations that are the problem. Jens Weidmann, president of the German Bundesbank, recently warned that “we should not underestimate the risk that central bank financing can be addictive like a drug.” This is true for both sovereigns and the market participants.

Unfortunately, traders look to be hooked already. Performance has departed from the fundamentals in recent months. Upon the release of bad data, markets have rallied on the hopes of more central bank elixir. David Morrison, market strategist at GFT Markets, says: “All markets have been doing is looking ahead to central bankers’ meetings. It has been the jawboning of central banks that has been driving markets.”

Some traders argue that it was a savvy move for Draghi to avoid speaking before the ECB’s policy meeting. Shavaz Dhalla of Spreadex questions what the markets were expecting: “Nothing concrete was expected. Was he really going to do anything before the ECB meets? It was a smart decision by Draghi.”

The ECB’s policy meeting on Thursday is one meeting that Draghi will not be able to cancel. However, it would be rash for traders to expect any definitive solution that will solve the Eurozone’s quandaries. Until the German constitutional court has ruled on the viability of the European stability mechanism next week, everything still remains in stasis, regardless of what the ECB chief says.

But one thing is clear: by the end of September, we should have a better idea about how the Eurozone’s struggling sovereigns will be rescued. It may not be the long-term solution, but it brings us one step closer to a solution or a dissolution. 

Key dates for the Euro

Producer Price Index (PPI) release. The consensus estimate is for a reading of 1.6 per cent year-on-year.

5 September:
Eurozone retail sales are expected to have fallen by 1.7 per cent. The Purchasing Managers Index (PMI) Composite is expected to show a reading of 46.6, showing further contraction. Traders will also be interested to see the yield that Italy auctions 10-year debt at.

6 September:
A key day for Europe: the German Chancellor, Angela Merkel, will meet Mariano Rajoy, the Spanish Prime Minister to discuss the crisis in Europe. The ECB will announce its interest rate decision and there will be a press conference with ECB president, Mario Draghi. Data on Eurozone GDP will also be released.

12 September:
All eyes will be on the German constitutional court, as it gives its preliminary ruling on the European Stability Mechanism and the European “fiscal compact”.

13 September:
The start of a two-day meeting where finance ministers and central bankers from the G20 nations meet to discuss the global economy.

14 September:
European council meeting. Eurozone finance ministers are also set to meet for two days and are expected to discuss Greek finances.