Last week, shortly after the ECB’s latest meeting disappointed markets and concluded without a discussion of Europe’s growing bond market fragmentation (which is to be expected since QE – the glue that held the Euro area’s bond market together – is ending) and which has since sent Italian bond yields soaring above 4%, we joked that “at this rate the ECB would make an emergency rate cut” just hours after announcing an end to QT and guiding to a July rate hike.
Once again, our “joke” was spot on because on Wednesday morning, just hours before the Fed’s first 75bps rate hike sine 1994, and with Italian bonds in freefall, European Central Bank “unexpectedly” announced it would hold an emergency, ad hoc meeting of its rate-setters starting 11am CET in which it would “discuss current market conditions.” It wasn’t immediately clear if a statement would be published after the confab.
The meeting, which comes less than a week after the rate-setting governing council’s last vote, raised investor expectations that the central bank is preparing to announce a policy instrument to stave-off another debt crisis in the region, which can only come in the form of more QE… which is ironic at a time when the ECB just announced it was phasing out all QE!
Italian government bonds rallied in price following news of the planned meeting, reversing some of the recent sell-off that analysts said brought the country’s borrowing costs towards the “danger zone”. Gilles Moec, chief economist at Axa, an insurer, said the “stakes are high” for the ECB “now that everyone is dusting off their debt sustainability spreadsheets for Italy, they probably need to go up an extra notch”.
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