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ISEQ holds-Draghi statement examined

Friday, August 03 08:53:10

The ISEQ is holding firm this morning following an initial drop and is currently trading at 3,149, up 1 point as markets have absorbed the Draghi statement in full and realised it's implications. These are discussed this morning by Davy Stockbrokers:

Market closed down yesterday after Mario Draghi failed to announce an immediate bond-buying programme. While it was expected that the ECB's main rate would be left unchanged, many had also expected an announcement of further extraordinary measures, thus living up to his word to "do whatever it takes" to ease the euro-zone crisis. Speculation that the Securities Markets Programme (SMP) could be revived was unfounded however, with Draghi unwilling to act in the bond markets until the euro-zone governments commit EFSF/ESM funds to bond-buying.

The ball is firmly back in the EU leaders court then, with the added incentive of the full force of the ECB's balance sheet to supplement any EFSF/ESM purchases, when they do occur. Draghi also confirmed that these purchases may be unsterilised, with the ECB not taking offsetting deposits from euro-zone banks, thereby increasing the monetary base. This would mean that the ECB would be engaging in full-scale quantitative easing, with the inflation hawks of the Bundesbank likely the one dissenting voice on this issue at yesterday's governing council meeting. One further condition which Draghi proposed in advance of bond-buying was "strict conditionality in line with established guidelines" for countries applying to the EFSF/ESM.

This suggests that Italy and Spain may have to agree to fiscal consolidation targets before the EFSF/ESM and ECB would step in to lower sovereign yields. Not enough to please markets then, but the promise of future large-scale bond-buying if EU leaders can agree on ESM involvement.

Yesterday's Irish exchequer returns for July indicated a continued surplus of tax receipts over Budget 2012 targets, with tax returns E500m, or 2.5pc ahead of target, while expenditure was still E217m above expectations. Nevertheless, the government remains on track to hit its deficit target of 8.6pc of GDP this year with the big tax-take months of September and November crucial to this goal according to Davy Stockbrokers