HALISTER1: ECB PREVIEW: Draghi Disappointing Easing Hopes May Rattle Rates

ECB PREVIEW: Draghi Disappointing Easing Hopes May Rattle Rates

(Bloomberg) -- ECB is probably in no hurry to ease further at this week’s decision as the Brexit fallout appears contained, partially due to easing measures already in place, strategists say in client notes and interviews.
  • Citigroup and Goldman Sachs expect ECB to announce an extension of QE beyond March 2017 this week; Morgan Stanley and Deutsche Bank among banks that pushed back expected timing of easing
  • Strategists see room for market disappointment in the event of no action given current pricing for more measures and QE- related bond scarcity issues
  • Draghi’s rhetoric will be key; no action may trigger euro- area curve steepening and some widening in intra-EMU spreads
  • Read here for more on Thursday’s decision
WHEN WILL ECB EXTEND QE?
  • CITIGROUP (Guillaume Menuet): extension of asset purchases for at least 6 months to be announced this week
  • JPMORGAN (Greg Fuzesi): QE to be extended beyond March 2017; formal announcement more likely in December than this week; don’t expect central bank to address scarcity either
  • BOFAML (Gilles Moec): ECB can’t keep options open until December; at least a commitment to continuing QE after March 2017 would be needed
    • “At the very least,” ECB to provide clear deadline this week for final decision to continue QE and signal, in no ambiguous terms, that a “reflection has started”
  • CREDIT SUISSE (Peter Foley): expect an extension before the end of the year, alongside technical tweaks to address bond scarcity
  • UNICREDIT (Marco Valli): another dose of stimulus is just a matter of time; regardless of the exact time, next move likely to be a 6-month extension of QE until at least September 2017
  • HSBC (Karen Ward, Fabio Balboni): ECB needs to extend QE horizon by 6 months to September 2017 from March at the very least
  • DEUTSCHE BANK (Mark Wall): no longer expect further easing this week; ECB will wait until December to extend QE
  • UBS (Reinhard Cluse): will likely only extend QE at December meeting
  • BARCLAYS (Fabio Fois): continue to expect ECB to extend QE beyond March 2017 by 6-9 months with a change to some technical elements, but without expanding monthly limits; that’s more likely in October/December than this week
  • GOLDMAN SACHS (Dirk Schumacher): ECB to announce extension of QE program to end of 2017 at Sept. meeting
  • BNP PARIBAS (Luigi Speranza): ECB will prolong asset purchases to September 2017 this week
  • MORGAN STANLEY (Elga Bartsch): ECB to ease only in December instead of September, with risk that it may not ease at all
  • CREDIT AGRICOLE (Valentin Marinov): small chance ECB will extend QE duration beyond March 2017
WHAT ELSE WILL THEY DO?
  • CITIGROUP: ECB to adjust modalities of PSPP this week, probably focusing first on increasing the issuer and issue limit from 33% to 50% for bonds that don’t contain collective action clauses (CACs)
    • Bank may also lower the main refinancing rate by 10bp to -0.1% to incentivize banks to take-up ECB liquidity at the three remaining 4-year TLTRO II operations
  • CREDIT SUISSE: most likely route is for ECB to retain gradual and flexible approach, loosening restrictions progressively on various parameters
  • HSBC: ECB may run out of German assets to buy in 1st half of 2017 on current parameters
    • Could extend QE horizon by another 6 months just by increasing issuance limit to 50% for non-CAC bonds; another change could be to include bonds with maturities beyond 30 years; option of deeper negative rates will probably be parked for now
  • DEUTSCHE BANK: any QE extension would need to be accompanied by other measures such as an increase in the issue limit on non-CAC bonds; further deposit rate cut unlikely
  • UBS: may adjust technical rules as soon as this week or in October; increasing issue limit on non-CAC bonds and expanding maturity range of purchases could be easily achieved
    • Scrapping deposit-rate floor and amending rules on substitute purchases also possible; deviation from the capital key allocation, cutting rates or including new assets is unlikely
  • BNP PARIBAS: ECB also likely to modify some of program’s parameters to accommodate buying for longer; raising the issue limit for non-CAC bonds would be easiest option
WHAT WILL THE MARKET RESPONSE BE?
  • JPMORGAN (Mika Inkinen, Antoine Gaveau): if central scenario proves right, bear steepening of euro-area curves and some widening in intra-EMU spreads likely, with magnitude of moves depending on Draghi’s tone
    • Any increase in the issue limit may drive mild bull flattening, while a removal of deposit rate floor would see pivot steepening; a significant move away from capital key would spur bear steepening, intra-EMU spread tightening
  • BOFAML (Athanasios Vamvakidis, Ralf Preusser): FX impact limited; risks to EUR may be to upside if ECB doesn’t announce QE extension this week as markets could take it as a sign of strong disagreements within GC on how to extend QE
    • If ECB commits to extending QE but doesn’t address bond scarcity, expect curves to flatten; front end may cheapen as market trims the implied probability of rate cuts and may see profit-taking in periphery
  • CITIGROUP (Harvinder Sian): baseline of 6-mo. QE extension is priced in OIS curve; if we are wrong, market will have to price higher probability of QE taper in 2017
    • Baseline of pushing the non-CAC bond limit higher infers an aggressive flattening rally that should be used to set up steepeners as other options on the capital key/depo floor will have to be considered
  • CREDIT SUISSE: any relaxation in capital key allocations would move markets the most, leading to a narrowing in bond spreads and some EUR depreciation
  • CREDIT AGRICOLE: EUR unlikely to come under sustained selling pressure without a strong signal the bank’s asset purchases will be expanded as well
  • BNP PARIBAS (Steven Saywell): See risks of a rise in long- end core yields in decision aftermath even if ECB delivers; no meaningful impact on EUR
  • DEUTSCHE BANK (Abhishek Singhania): market pricing for further cuts should be lower; any signs of ECB concern over impact of more negative rates may drive sell-off in belly
    • Recommends short EUR vs JPY in 1Y1Y OIS; impact on EUR curve may be limited even if ECB doesn’t extend QE this month, given flatness of the 5/10 and 10/30 curve doesn’t show when market is pricing an extension
  • UBS (Themos Fiotakis): Sooner or later, perhaps even in the upcoming meeting, ECB may need to start addressing certain modalities of its program, ultimately leading to a steeper curve; impact on longer-dated bonds harder to predict; easier to see a steeper curve than higher yields
  • BARCLAYS (Giuseppe Maraffino): could see further volatility should ECB opt to wait before acting, hence outright duration and peripheral spread positions don’t offer good risk/reward
    • Stay short 10Y bunds vs Treasuries, receive 15Y fwd point on EUR swap curve vs wings, long PGB 4/30 steepeners, and long 7Y French ASWs
  • MORGAN STANLEY (Hans Redeker): ECB can’t weaken EUR; even if it extends its QE program or cuts rates further, it won’t be able to push down long-term bond euro-area yields substantially to weaken currency given yields are already low or negative
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
2539Z GR (European Central Bank)

People
Abhishek Singhania (Deutsche Bank AG)
Antoine Gaveau (JPMorgan Chase & Co)
Athanasios Vamvakidis (Merrill Lynch International)
Dirk Schumacher (Goldman Sachs Group Inc/The)
Elga Bartsch (Morgan Stanley & Co International PLC)

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