Four Different Scenarios For ECB Sovereign QE: Credit Suisse

Ahead of the ECB meeting, Credit Suisse published a very interesting preview concerning the four most likely soevereign QE scenarios:

 

We consider four potential scenarios for ECB sovereign bond purchases depending on 1) the degree of risk sharing and 2) the size the ECB announces. We believe the market reaction to an announcement of QE is likely to be very different depending on these two factors.

 

 

4 scenarios:

 

1) Small size and low risk sharing: The first scenario is a purchase programme that is below €500bn and has risk sharing below 50% of the total programme. We believe the market reaction would very negative for risky assets in general and the periphery in particular. We believe this scenario remains bullish core rates driven by the likely riskoff moves in risky assets and removal of any debt mutualisation.
 
2) Large size and low risk sharing: The second scenario is a purchase programme with a size closer to €1 trillion but risk sharing of the overall purchase programme still limited to a maximum of 50% of the total programme. We believe such a programme would be bullish risky assets and core rates given the upside surprise in the size. We expect a similar move in core rates as in the Japanese QQE, where the flow of purchases will trump any change in inflation expectations.
 
3) Large size and large risk sharing: The third scenario is identical to the second scenario in terms of size but risk sharing will be above 50% of the programme. We expect such a programme to very bullish risky assets and, in particular, leading to a strong rally in peripheral bond markets. Given the high degree of European debt mutualisation in this scenario, we expect core rates to sell off.
 
4) Small size but large risk sharing: The fourth scenario is equal to the first scenario in terms of size and equal to the third scenario in terms of risk sharing. We believe the market reaction in such a scenario would be bearish risky assets but peripheral markets should fare well given the higher degree of mutualisation relative to market expectations.