Explaining Super Mario’s Trifecta

The Buttonwood’s Notebook columnist (Philip Coggan) of the Economist provides a presumable explanation of last week’s rally following ECB Prez Mario Draghi’s pledge to do “Whatever it Takes to Save the Euro”

AN interesting note from the always-perceptive Dhaval Joshi at BCA Research shows that July was a remarkable month. It was the only month in the last 400 in which European stocks, the German 10-year bund and gold rallied by more than 2.5%. Even when Mr Joshi uses a lower 2% hurdle, the last simultaneous rally on this scale was February 1987, and there have been only seven such months in the last 30 years.

Normally, you would expect the conditions for a simultaneous rally to be rare. Inflation would be good for gold and bad for bonds; a recession would be good for bonds and bad for equities and so on.

Super Mario was partly responsible for July's trifecta with his promise to do whatever it takes to save the euro. Equities rallied on the hope that Europe's economy would avoid a catastrophe; gold rallied because the ECB would likely create money; and bunds rallied because the ECB would save all the costs of Spanish rescue from falling on the German taxpayer. or at least that is a plausible explanation, based on the fundamentals. An alternative is that this was a risk-on rally in which investors moved money out of cash and into any likely asset class.

I may add a more important dimension to the above explanation: shorts had been deliberately set up for the ambush

One example: Euro shorts collapsed by 10% in one week and 35% in one month.

Notes the Zero hedge,

And where two months ago, the net short position in the EUR hit an all time record, north of -200K contracts, in the interim this number has contracted by over a third, and as of minutes ago was revealed to be "just" 139K in the week ending July 31, a 10% drop in shorts in one week. Why is this important? Because while short covering rallies have long been yet another narrative to keep shorts on the sidelines, the probability of such an event has declined dramatically now that the bulk of the weak hands have been kicked out, and the net exposure is back to January 2012 levels.

Underneath all the supposed noble sounding rhetoric to save the Euro, interventionism has mostly been about price controls or the manipulation of markets.