The global financial system–and the global economy–looked much brighter today than it did yesterday after the European Central Bank decided to (finally) implement a mechanism (the OMT, or the Outright Monetary Transactions program) to provide support to the Euro Zone’s peripheral countries. Essentially, the ECB has declared that it will potentially purchase an unlimited amount of the peripheral countries’ short-term government bonds (up to a three-year maturity). With the Euro Zone’s core countries such as Germany and France on the verge of a recession, such support makes political and economic sense, especially with Spain’s 25% unemployment rate amid ongoing rumors of significant capital flight.
In response, the Dow Industrials jumped 1.87%; the S&P 500 2.04%; and the NASDAQ Composite 2.17%. Surprisingly, gold only rose slightly, by 0.4%, while WTI crude oil actually declined by 0.1%.
The ECB’s latest action is more than an incremental step. In essence, the ECB is monetizing much of the Euro Zone’s peripheral debt, which runs counter to the original intent of policymakers when they created the Euro in 1999. The ECB’s latest action cannot be justified unless there is a promise of fiscal integration in the future. This is the direction I see the Euro Zone heading. This has been the dream of European policymakers since the end of WWII. They are getting what they had always wanted, although not in the way they envisioned. Either way, the ECB’s latest resolve puts a floor on risky assets across the globe (a form of the “Draghi Put,” if you will), especially bank and consumer stocks in Europe.
Contingent on the U.S. “fiscal cliff” being resolved after the U.S. Presidential Election (Intrade puts the chance of an Obama win at 58%), I am pretty optimistic on U.S. economic prospects in 2013, and beyond.