If the game no longer works, scrap it. That’s what the ECB did last week. The moribund Securities Market Program (SMP) was finally tossed away and a new game, acronym and rule book was issued. A couple of things stand out in the Outright Monetary Transactions (OMT) rule book: the unlimited nature, the fact that the ECB ranks pari passu with other creditors as well as the detailed weekly disclosures of what the bank has bought.
Of course, although the rule book has been established, this is a game with two players and the ball is now firmly in the court of policymakers who will have to agree to conditionality if they request aid. How that ball is returned, and how quickly, will determine the extent of implementation risk markets need to suffer before the game really gets going. However, the key is that the rules are now established, which greatly diminishes the tail risk markets have endured for most of this year, and like in any game, investors can choose sides. At the moment we’re on the ‘risk’ side. True, uncertainties remain, particularly a slowing global economy, but central banks have the tools, and seemingly the willingness to deploy those tools, to counter this. Our bias is to use any retracement in risk assets an opportunity to buy more, as opposed to taking profits.