ECB PREVIEW: Market Impact Depends on More Clarity on Next Steps
(Bloomberg) -- The ECB probably won’t ease policy further at Thursday’s meeting but may hint at steps it could take in September and possibly even tweak QE parameters to address bund scarcity, analysts say.
- The extent to which FX, EGB markets will respond depends on how much clarity President Draghi provides on future action; in particular, any indication on whether the central bank could change the capital key
- Euro has pared some gains against sterling made after the U.K. Brexit vote, and is still ~2% lower vs USD than before the result; EUR/USD is also ~3% lower from when ECB announced QE in Jan. 2015, while BTP and SPGB widening after the U.K. vote has reversed
- BofAML
- Expect Draghi to start preparing markets for QE extension beyond March 2017, which is negative for EUR, strategists including Athanasios Vamvakidis write in client note
- Relaxing some of QE constraints to keep the program open-ended, such as abandoning the capital key, isn’t fully priced in yet
- Doesn’t expect a strong EUR move for now, and with the pressure off the ECB to overdeliver, the currency may remain broadly range-bound
- Any sustained move in EUR/USD below 1.10 needs either a sharp downward equity market correction, or stronger U.S. data that forces the Fed to hike this year or early 2017
- RBS
- Expect further ECB easing this year but no rate cuts or QE acceleration this week; investors will be looking for hints on potential changes to PSPP, according to strategists Marco Brancolini and Imogen Bachra
- With so many bonds now ineligible for QE and given that number will increase, some tweaks to the program are possible as soon as Thursday
- The easiest and most likely would be to drop the 31-yr maximum maturity; it could also increase issuer limits, although less likely
- The former would be bullish for longer tenors but bearish for IRISH, while the latter would be bullish for both
- JPMorgan
- Expect Thursday’s meeting to fall short of expectations of concrete action on scarcity, so stick to main trade recommendations: longs in 3Y, 10s/30s bund flatteners and intra-EMU tighteners, analysts Gianluca Salford and Aditya Chordia write
- If Draghi doesn’t hint at any relaxation of the capital key allocation, don’t expect spreads to widen any more than a handful of bps
- Most likely is a signal that the policy stance will be reassessed in Sept. and that policy will be eased if needed, economists at the bank write in a separate note
- Barclays
- While there’s unlikely to be imminent pressure regarding lack of available German bonds to buy, ECB may want to change some QE parameters or hint at such a change in order to reduce future uncertainty, analyst Cagdas Aksu writes in client note
- ECB is also likely to hint at or even change some of the QE program technicalities at the July and September meetings
- Two main options that would be relatively easy to implement are dropping the depo floor and extending purchases to include maturities below 2y and above 31y; these would be bullish for duration and ASW widening- friendly and marginally positive for EGB spreads
- Commerzbank
- Expectations are for ECB to make some kind of adjustment to QE program, particularly as it is increasingly running into issues of scarcity with respect to German bonds, analyst Thu Lan Nguyen says in e-mailed comments
- Market geared for dovish ECB; expects some sort of further monetary easing on the back of Brexit risks, not necessarily at that meeting but in the not-too-distant future
- The open question is how ECB will ease policy further; many expect it to at least extend QE beyond March 2017
- If there are hints of stronger measures, another rate cut or an increase of the QE program, EUR is likely to weaken
- Sees greater chance of a less dovish ECB; should the bank signal it isn’t planning to ease monetary policy further, EUR may appreciate strongly
- Citigroup
- ECB is set to kick policy easing to Sept., but tweaks in PSPP parameters are feasible, favoring long core and eventually periphery, analysts Harvinder Sian and Aman Bansal write in note
- If Draghi does announce a tweak to PSPP, expect the easiest consensus would surround the adjustment limits on (non-CAC) bonds, perhaps followed by a re-weighted capital key basis for those markets where buying is problematic
- Clearly, the former should be supportive for non-CAC bonds, especially in the core, and this seems to be getting priced
- ING
- Draghi will want to prevent euro from rallying but a EUR selloff is unlikely, analyst Petr Krpata says in e- mailed comments
- Doesn’t expect the central bank to act; instead, like the BOE, it will wait to assess the current situation and effects of Brexit
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Aditya Chordia (JPMorgan Chase Bank NA)
Aman Bansal (Citigroup Inc)
Athanasios Vamvakidis (Merrill Lynch International)
Cagdas Aksu (Barclays PLC)
Gianluca Salford (JPMorgan Chase & Co)
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