ECB Succeeding in Scaring off Speculators: Strategist
The €720 billion ($936 billion) stabilization fund and the Europe Central Bank's decision to start pumping money into the system will avert a liquidity crisis, Philippe Gijsels, the Head of Research at BNP Paribas Fortis Global Markets, told CNBC Monday.
“So they all understood that risks are massive and reverted to draconian measures and an unprecedented show of force," Gijsels said.
"This will certainly scare off speculators in the short run." Failure to take the nuclear option of ECB buying of bonds could have led to huge economic problems, and if the ECB had not started “buying government money by expanding the ECB's balance sheet freeing up new big amounts of money it would have resulted in cutting back government deficits not only in Greece but in most if not all countries in the euro zone," he said.
"This would have meant severe pressure on economic growth, a process that would, almost by definition, be highly deflationary," he added.
Deal Buys Time
But longer term-problems remain, Gijsels said.
“If the countries get their fiscal house in order it will be deflationary," he said. "However, if there is one thing the central bank and the Governments have done is bought time.
This means that there is less pressure to get the house in order now than before.
So eventually in this respect this could be a first step in monetizing the debt” Monetizing that debt has been the problem in recent days as investors fretted over the impact of a liquidity crisis on European and US banks.
How this story ends will depend on governments and central banks, Gijsels added.
"Just like the US and the UK, Europe is now in the camp of pumping money in the system whenever there is trouble," he said.
"So it means that discussing economic or corporate figures for that matter become like a broken pencil, pointless.” “For we know that after each positive figure there is a government and/or central bank pushing an unprecedented amount of money in the system,” he said.
What does this mean for the market? Gijsels remains bearish.
“From a technical point of view, the damage that has been done to the charts cannot be erased just like that," he said.
"We have strong sell signals on most charts where the trend has turned down after strong negative divergences on technical indicators over multiple time frames.” For those hoping for more stock market gains from here, Gijsels has a warning.
”In short, a continuation of the weakness after an initial relief rally remains our working hypothesis,” he said.
But the EU’s nuclear option will make things a little better than he said he believed going into the weekend.