Investors have put their faith in the European Central Bank's ability to get on top of the eurozone debt crisis and even if detailed plans take longer to materialize than expected, the momentum in financial markets may prevent an immediate meltdown.
After Spanish borrowing costs spiked in late July, pushing the country towards a sovereign bailout which the eurozone can barely afford, ECB President Mario Draghi promised to "do whatever it takes" to preserve the euro.
The ECB, in the eyes of financial markets, is the only European body with the firepower to fully tackle a debt crisis that has crippled Greece, Ireland and Portugal, and currently threatens Spain and Italy.
As a result, even though expectations are high that Draghi will reveal details of a large-scale bond buying program at the bank's Sept. 6 policy meeting, the bond market is unlikely to push Spain and Italy straight back to breaking point if policymakers need more time to thrash out the plan.
"Any risk-off move will be limited by the fact that this would be a postponement, rather than a dashing of hopes," said Richard McGuire, fixed-income strategist at Rabobank in London.
German Chancellor Angela Merkel has signaled she is happy with Draghi's plan but the Bundesbank is opposed. Although it does not have the power to scupper the plan, continued criticism could undermine it.
So febrile is the atmosphere that the mere announcement that Draghi would not attend a meeting of central bankers in Jackson Hole, Wyoming, later this week, pushed the euro higher on the basis that he must be working hard to get all his ECB partners on board for a new bout of bond-buying.
Draghi said on Wednesday the ECB must employ "exceptional measures" at times to fulfill its mandate of delivering stable prices, in an opinion piece aimed at calming German angst about the bank's policy course.
Nevertheless, any grace period will be limited to around a month and any signs of an ECB silver bullet being delayed beyond the bank's Oct. 4 meeting will have fingers hovering over the "sell" button on stocks, bonds and the euro.
The ECB's support is central to a string of interdependent events taking place in September, all of which need to fall into place to have a long-term calming effect on financial markets and draw a line under the worst of debt crisis.
Any ECB bond buying is contingent on Spain formally asking for support and the region's bailout fund, a key pillar of any aid package, awaits approval by Germany's constitutional court on Sept. 12.
In expectation of these pieces falling into place, Spanish bond yields tumbled during August while the euro rose by 4 percent and European stocks hit a 13-month high.
That rally has already lost steam as nervousness creeps back in and investors have trimmed positions that benefit from a rise in the value of riskier assets such as equities.
After rallying nearly 10 percent between July 26 and Aug. 20, European stocks are now trading well below their peak and options traders have seen an increase in people taking each-way bets on whether the market will rise or fall.
Strategists said prices of Spanish bonds and the euro indicated an expectation that the ECB would provide details next Thursday of how much cash it was willing to pump into bond purchases and give some guidance on how that money would be spent.
Ultimately, markets want more, even if they are prepared to wait until October to see it.
"What's probably priced in there is that they would do unlimited bond purchases or set interest rate targets (on peripheral bonds)," said Tobias Blattner, economist at Daiwa Capital Markets in London.
Anything short of this, or a hitch elsewhere in the chain of events needed to ensure ECB action, would result in the euro falling, Spanish bond yields rising and equity markets pulling back further from their recent highs.
Stuart Frost, head of Absolute Returns and Currency at fund managers RWC Capital, said the euro could tumble to as low as $1.20 - a level not seen since June 2010 — from its current $1.25 if the ECB plan fails to materialize.
But any pullback was likely to be less severe while the offer of ECB support remains on the table, such is the potency of the idea that the ECB can, in theory, buy unlimited amounts of debt.
"In case the promise of delivering is pushed back to another meeting, we expect the euro's losses to be limited to $1.22-1.23," Frost said.
The August risk rally was also built on limited trading volumes, with many long-term investors choosing to enter September with flat positions — a wait-and-see approach that should cap forced selling in the event of a market fall.
With the crisis knocking at the door of Spain and the even larger Italian economy close behind, patience is unlikely to stretch far beyond September before selling kicks in, taking markets back towards crisis levels.
Spanish two-year bond yields fell from around 7 percent to less than 3.5 percent earlier this month after Draghi said the ECB would target its fire at shorter-dated paper, but an outright failure to lay the foundation for such support would quickly see a return to those unsustainable highs.
That would put huge pressure on Spain's ability to borrow the money it needs to finance its spending at a time when it must borrow consistently and cheaply from the market to raise the 25 billion euros required to meet its 2012 funding target.
"We would go back to the worst levels, with huge supply to come to the market and redemptions due," said Alessandro Giansanti, strategist at ING in Amsterdam.
"It's easy for yields to go back to 7 percent in the short end like we saw in July. For me when it's at 7 percent it's already unsustainable for Spain."
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