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Why Merkel's Comments Had a QE Effect on Markets

The euro zone may not have delivered any fresh stimulus to bolster the economy, but the way markets have rallied in recent weeks would suggest otherwise.

German Chancellor Angela Merkel
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German Chancellor Angela Merkel

Stock markets from U.S. to Asia got a boostafter German Chancellor Angela Merkel vowed Thursday to do “everything” possible to keep the euro intact. Her comments follow similar rhetoric from European Central Bankchief Mario Draghi three weeks ago, which also stoked a rally in global equities.

Some analysts say the remarks have had an effect akin to launching a fresh round of quantitative easing , and more importantly, injected confidence into markets.

“There’s no secret out there, I call it quantitative easing incognito, but we all see the effects,” Jack Bouroudjian, CEO of fund manager Bull and Bear Partners, said on CNBC Asia’s “Squawk Box.” “Volumes are slim but, remember, the tone of what is happening now seems to be a lot different. Just a few weeks ago, we were talking about a Greek exit. Now, it’s more a question of what Europe is going to look like, in another couple of years staying together.”

Global markets have been rising ever since Mario Draghi promised on July 25 to do “whatever it takes” to protect the euro zone from collapse, and continued to gain even when no bazookas were delivered at the ECB meeting a week after. The S&P 500 has gained 5.8 percent while the Stoxx 600 has climbed 8.6 percent since then.

Merkel’s pledge lent firepower to the market uptrend as she has been a key figure in resisting the introduction of common euro zone bonds which proponents see as a solution to the region’s debt crisis .

“Merkel's comments were uplifting not only because she seemed to be aligning closer with the ECB, but also because she stressed that ‘time is of the essence’,” said Vishnu Varathan, Market Economist with Mizuho Corporate Bank in Singapore. “So the sense is that euro zone policy-makers could begin to converge more quickly.”

Still, the effects of the rhetoric may be short-lived as nothing has fundamentally changed in Europe, warned Tony Nash, Managing Director of IHS Global Insight. He also doesn’t believe there are legs to the rally because trading volumes on markets are extremely thin.

“I think they are hoping for a ‘whatever-it-takes’ rally part 2, which was kind of what happened after Mario Draghi’s comments,” Nash said. “Look, what’s fundamentally changed is not a lot. We’re expecting Greece to be out of the euro zone by July next year. Spanish banks are obviously still a big issue. So it is to some extent, keeping things in a holding pattern until everyone comes back from holiday and they can get back to work.”

Nash, who expects the euro zone economy to contract 0.5 percent this year and 0.3 percent next year, said that while Draghi’s comments were well-intended, the bank could have resolved the crisis a while ago by getting the buy-in of national central banks to back Europe’s debt.

“They could have done this (backing pan-European debt) two years ago when (Jean-Claude) Trichet was still the president,” Nash said. “If the statement was made two years ago, a lot of money could have been saved; a lot of political credibility could have been saved. But it just keeps getting ticked off and ticked off and ticked off.”

Investors may have responded positively now but their patience could run out soon, he added.

“People don’t want to buy but they are afraid to sell,” Nash said. “Everything is rangebound. I think investors are still waiting to see but we have been waiting to see for the past 3 years. I don’t sense a shift.”

- By CNBC's Jean Chua.

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