ECB Invokes ‘Desperate’ Measures; Market Goes Into Mania Mode

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Boosted by European Central Bank President Mario Draghi’s announcement of an open-ended bond purchase scheme aimed at bringing down Spanish and Italian borrowing costs, US stocks broke-out Thursday to finish on a multi-year high even as the bank chief made good of his earlier pledge to preserve the common currency at any cost.

Countries must seek international bailout and adhere to strict budget rules before the ECB buys distressed bonds from the secondary markets, a plan which may not have the support of the German Bundesbank.

Risk sentiment got a further boost after the initial jobless claims declined by 12,000 to 365,000 in the week ended September 1 and the ISM non-manufacturing  index climbed to a three-month high of 53.7 in August from 52.6 in the prior month.

While Mario Draghi pulled out all stops to do “whatever it takes,” it does not mean that magically all European issues have been solved, as Mark Grant, author of Out of the Box explains:

One of the primary purposes of a government, any government, is to sustain itself. In its final hours it will do almost anything possible for its self-preservation.

If the rumors are to be believed and Draghi is going to propose unlimited bond buying in the short end of the curve for the nations of Europe in maturities up to three years then it must be said that Mario Draghi, personally, has re-written the treaties for the European Union which specifically forbids what he is apparently about to undertake.

In my mind, this is an act of desperation that makes me quite nervous because my thinking extends out past the announcement that will be made later today as I consider its consequences, ramifications and where the focus will shift which will be to the recession in Europe and to the fundamental financial health of the nations in the European Union and then to the fundamental financial health of the European Central Bank itself.

Click here to read the complete analysis.

Nevertheless, the Dow Jones Industrial Average (DJIA) zoomed 245 points, the highest since end-December 2007, with all the 30 components of the blue-chip index gaining.

The S&P 500 Index (SPX) jumped 29 points, its highest level since January 2008. Materials, technology and financials fronted the gainers among its 10 business groups.

Clocking its best score in over a decade, the NASDAQ Composite Index (COMP) surged 67 points, its highest since November 2000.

Treasuries retreated, pushing the yields up to near one-month highs after ADP Employer Services data showed US employers added 201,000 jobs in August, beating economists’ forecast of 140,000 jobs gain and easing demand for safe haven assets. The benchmark 10-year Treasury yield surged seven basis points to 1.67 percent while on 30-year Treasury bond yields traded nine basis points higher at 2.79 percent.

Meanwhile the euro rose to its highest level in more than two months against the greenback after Draghi delivered on his earlier promise to bring down borrowing costs for south Europe’s struggling economies. The dollar index, a gauge of the USD’s strength against a basket of six currencies, fell to 81.089 from 81.253 in late Wednesday trading.

European stock markets rallied while Spanish bond yields plunged after Draghi’s Thursday announcement with the pan-European Stoxx 600 index vaulting 2.3 percent, triggered by a rally in the banking ETFs.

In the ETF space, funds linked to Spain and Italy outperformed others by a wide margin. The iShares MSCI Spain Index Fund (EWP) and the iShares MSCI Italy Index Fund (EWI) surged 5.78 percent and 5.36 percent, respectively.

The State Street SPDR S&P 500 (SPY) rose 2.03 percent to $143.75, its highest since May 2008 while the PowerShares QQQ (QQQ) that tracks the 100 largest non-financial firms on NASDAQ, rose 2.22 percent to $69.53. After yesterday’s jump, the Volatility Index (VIX) tracking ProShares VIX Short-Term Futures ETF (VIXY) crashed 10.3 percent as risk sentiment recorded a significant improvement.

Whether this rally is the basis for a new bull market or simply a pump and dump scheme remains to be seen. Right this moment, all worldly issues seem to be resolved if you can believe the equity market.

For all of the latest momentum numbers and Trend Tracking Index (TTIs) positions please see the latest StatSheet, which I will post shortly.

Disclosure: No holdings

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