The entire mood of the morning changed at 3am when ECB member Nowotny in an interview said in reference to the ESM one day getting a bank license which can in turn be used to borrow money from the ECB, “There are pro arguments for this…It is not something that is only in the field of monetary policy, so this is part of a broad discussion.” By borrowing money from the ECB, the ESM would be able to leverage its resources above and beyond its initial 500b euros of capital and thus be better able to deal with bigger problems. Spanish and Italian bonds rallied sharply off their lows of the morning in response. In particular, the Spanish 2 yr yield, after jumping 50 bps to above 7% prior to 3am, is now down on the day and the euro jumped as well. Data wise in Europe, the German IFO business confidence figure fell to the lowest since Mar ’10 at 103.3, below estimates of 104.5. The UK economy contracted for a 3rd straight quarter, falling .7% q/o/q vs expectations of a drop of .2%. Italian consumer confidence did bounce slightly off the lowest level since at least ’96. In the US, record low mortgage rates sent refi apps up another 1.8% to the highest level since Apr ’09. Purchase apps though fell by 3.2%.
