European Central Bank calls emergency meeting to discuss market turmoil

The ECB (European Central Bank) in Frankfurt am Main in front of a dramatic sky

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More central banks are getting nervous about current market conditions ahead of the Fed's closely-watched policy announcement that will take place at 2 p.m. on Wednesday.

The European Central Bank has called an "ad hoc meeting" for Wednesday morning as bond yields surge and investors dump southern European government debt.

The meeting could conclude and statement could come around 7 a.m. ET, according to reports.

In fact, the yield on Italy's 10-year government bonds reached 4.2%, the highest level since 2013 and up nearly 75 basis points in just five days, before falling back on word of the meeting (compare that to the 2.2% yield on German 10-year bunds).

Could the ECB create a new bond-buying tool to contain the fallout as it embarks on a series of rate hikes to fight record-high inflation?

From the FT, Morgan Stanley outlines three possible outcomes:

  1. More verbal intervention
  2. Reinvestment of the Pandemic Emergency Purchase Program: "The ECB could formally decide to activate PEPP reinvestment flexibility and start buying BTPs and Greek bonds. It may also announce a dedicated envelope."
  3. An anti-fragmentation tool: "The ECB could decide on a new program and announce its key features today. The program would likely only start some days after the announcement."

Still, the "need to prepare the ground to defend the Eurozone bond market highlights the ECB’s dilemma: How can you use monetary policy both to target inflation and to target bond market stability?" SocGen's Kit Juckes wrote. "And how can you stave off fragmentation without easing monetary conditions through additional bond purchases?"

"If the stability of the bond market is more important than the ECB’s inflation mandate, it can stymie monetary policy normalization, until there’s a fiscal, as opposed to a monetary solution to the euro’s Achilles Heel."

"The renewed concern around peripheral spreads reaffirms our bearish EUR bias and we have reinitiated EUR/USD shorts as stagflationary concerns plague the euro," J.P. Morgan's global strategy team said on Monday.


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