What makes this week’s rally different to the one in July 2012 — when the eurozone really did look like it was on the edge of disaster — was that unlike then, Mario Draghi had to do more than utter a few words to have an effect.
Back in 2012, he said the central bank would do “whatever it takes” — this time, he’s actually done just about everything he can.
While that is great news for eurozone periphery citizens and their economies, investors may well start to question just how much upside is left.
Of course, perhaps the biggest dovish move — quantitative easing — is still on the table and the more speculative of investors could well be sticking with the periphery in the hope that they get even more juicy returns later this year.
But one shouldn’t forget that Draghi is a master of inspiring markets with rhetoric. He may hint at a widespread bond buying programme, but that doesn’t make it a certainty.
That could make investors start to question how much is left in the rally. With the Bank of England and Federal Reserve likely to raise rates next year, Draghi could well keep the bluff going until that point — and let the euro devalue as sterling and the dollar rise.
Many investors spoken to by SSA Markets this week seem to be taking just that view. A syndicated return for Cyprus or another deal by Greece would of course still offer the tasty yield that should interest investors, but for the other four countries — Ireland, Italy, Portugal and Spain — the yields on show may well be reaching their fundamental value.
And of course, all of these countries’ economic recoveries are still tentative. The striking down of a series of austerity measures by the Portuguese supreme court last week and the subsequent rise in the country’s yields — decoupling from the rest of the periphery — shows that this story still has some twists left.
The rally still has legs — but the sprint is over.
