“The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing.”
Three months ago in this column we advised investors to fasten their seatbelts because in, our view, simply too many investors had leapt aboard the bond bandwagon of blind consensus. That was back in April and volatility has since returned in style. First we saw a sharp back-up in sovereign bond yields in the eurozone then a new season of the interminable Greek tragedy.
But we also pointed out, as early as May, that the European Central Bank (ECB) was out on patrol and that it was too early to ring the bell on the bull run for bonds. Whatever the outcome of the Greek referendum (still unknown at the time of writing) we believe that the ECB’s commitment will, in the coming weeks, be subject to its toughest test since the summer of 2012. A thorough test of several types of commitment. First up will be the emergency funding of Greek banks (Emergency Liquidity Assistance (ELA)) – an end to ELA would provoke Greece’s bankruptcy. What arguments will the ECB advance to maintain it? Would it be decreased or wound down if NO is the choice of the Greek people? What means will be used to intervene in the markets and ensure the transmission of monetary policy? The recent statements of Benedict Coeuré and especially the extension, announced on July 2, of quantitative easing to new issuers provide guidance as to the ECB’s intentions. To quote Mr Draghi’s ‘bumble bee’ speech from 26 July 2012 “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.“
Copyright Option Finance – 6 July 2015