Bold comments from the European Central Bank (ECB) President Mario Draghi that the ECB will do “whatever it takes” to protect the euro zone from collapse are raising hopes that risk appetite could return to markets beaten down by the debt crisis, analysts told CNBC on Friday.
“The key is that he (Draghi) is now clearly recognizing the problem and that it is within the mandate of the ECB to fix it. In fact Draghi is starting to sound a bit like (Federal Reserve Chairman) Ben Bernanke, which is a good thing,” said Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital in Sydney.
“They (Draghi’s comments) could be the potential turning point to the crisis that has been going on in Europe since May 2010,” he added.
Draghi’s pledge to preserve the euro brought relief to the financial markets; the euro strengthened above $1.23 for the first time in two weeks after his comments, yields on Spanish and Italian bond fell sharply and equity markets are higheron Friday.
But how long will the optimism last?
In December, the ECB acted to sooth volatile markets by launching a program that created more than 1 trillion euros of liquidity for the region’s cash strapped banks. That bought three months of calm to financial markets before the volatility returned: this week markets have been rattled as Spanish bond yields jumped well above 7 percent, while ratings agency Moody’s dimmed its outlook on Germany.
The key for markets now is that the ECB backs up its rhetoric with action such as resuming its sovereign-bond buying scheme – the Securities Markets Program - that has not been used for months, analysts say. This could bring risk appetite back to the markets, they added.
“The thing is we have to see some decisive action so we don’t see that this (Draghi’s comments) isn’t just another series of hot air,” Jonathan Barratt, Founder of Barratt’s Bulletin told CNBC Asia’s“Squawk Box”, adding that expectations of action from the ECB were underpinning gold prices.
Coordinated Policy Action?
Michael Gayed, Chief Investment Strategist at Pension Partners, told CNBC that any action by the ECB could even be the start of a coordinated drive by global central banks to kick start weak economic growth.
“If the ECB starts to act, it will provide cover for the Fed, for many other central banks to step in,” Gayed said.
“So while there’s a lot of rhetoric about this idea that Draghi may not have enough bullets, expectations wise, if you have global shock and awe, risk appetite really can come back,” he added, referring to possible easing by central banks around the world.
The U.S. Federal Reserve meets next Tuesday and Wednesday, while the ECB and the Bank of England are due to hold their monetary policy meetings on Thursday.
“There’s a high prospect the Fed could announce quantitative easing next week and then the ECB may take some action – some people might say that is coordinated,” said AMP Capital’s Oliver.
By CNBC's Dhara Ranasinghe