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ECB PREVIEW: Draghi May Signal More QE as Forecasts Cut – Bloomberg

From Deborah L Hyde at Bloomberg:

 

Draghi is likely to say the central bank stands ready to do more at this week’s press conference, as inflation remains low after nearly six mos. of a bond-purchase program that’s meant to revive it, analysts write in published research.

 

JPMorgan (Greg Fuzesi)

- The main change in forecasts will come from oil prices, which lowers the predicted path for inflation over the next 12 mos.; expect 2017 est. to remain unchanged at 1.8% y/y with some risk of 1.7% y/y
- If mkt conditions and EM prospects don’t improve, easing in Oct. or Dec. would become a real possibility

 
Barclays (Philippe Gudin and Antonio Garcia Pascual)

- Expect ECB Draghi to maintain accommodative stance and insist that GC still has tools available should monetary and financial conditions tighten further
- Expect ECB to announce further easing before yr-end

 

Nomura (Nick Matthews and Norbert Aul)

- The risk of further ECB action as early as this week has clearly increased; while not the baseline case the likelihood of a surprise is elevated
- One tweak GC may be discussing is the 25% limit on buying, given originally said this initial cap would be in place for 6 months
- Too early for GGB collateral waiver

 
BofAML (Analysts led by Gilles Moec)

- Avoiding more euro re-appreciation is the N-T priority and “talking dovish” will likely be the ECB’s first port of call; given real economy data and Fed outlook uncertainty, hard to take action this soon
- Further out, China’s impact on consumer prices will matter more than growth effect and saying QE will continue beyond Sept.2016 would be a powerful form of forward guidance

 
Goldman Sachs

- Expect no change of stance but the statement and Draghi’s remarks will probably have a dovish undertone
- Expect GC to acknowledge uncertainty and echo comments in July that the ECB would respond by using all instruments available within its mandate

 
Deutsche Bank (Peter Sidorov, Marco Stringa, Mark Wall)

- While proprietary Financial Condition Index has tightened sharply in past few weeks, bank credit, static growth, lower oil prices are among reasons to keep policy steady
- Expect 2017 inflation forecast to be revised marginally lower
- Further out, capital outflows from China or falling FX reserves could weigh on the euro or EGB yields
- Expect the ECB to reiterate its readiness to act, if necessary

 
RBS (Giles Gale)

- Staff forecasts for inflation will be revised down for 2015, and probably for 2016; doubt end-2017 will slip this time
- Now is not the time for QE-extension but it’s coming soon

 
Morgan Stanley (Elga Bartsch)

- ECB likely to stress its easing bias; unlikely will take any tangible policy actions, although can’t be ruled out completely
- Expect staff to lower GDP projections to 1.25% and 1.75% vs 1.5% and 1.9%, reflecting lower-than- expected growth in 2Q and somewhat higher EUR/USD exchange rate

 
Market Securities (Christophe Barraud)

- ECB is unlikely to change its monetary policy stance as early as this meeting although dovish tone should stay
- Further non-conventional measures are unlikely although can’t be completely ruled out
- If it does make any changes, could alter the list of eligible agencies, change the 25% purchase limit on individual issues; will likely discuss the waiver for GGBs

 
RBC (Timo del Carpio)

- The GC’s dovish slant will probably remain fully intact even as the economic backdrop should encourage the ECB to leave policy unchanged
- Leaving the door open is very different from actively preparing a change of stance and recent remarks from GC members suggest a “wait-and-see” approach will prevail
- Since effects of easing still need time to feed through to the real economy, arguing for verbal intervention likely to be the primary means of cementing expectations

 
UniCredit (Marco Valli)

- Draghi likely to sound more dovish than he did in July; don’t expect any explicit hint that central bank is reconsidering policy stance, though door for further stimulus remains wide open
- Fall in Brent crude prices may push inflation forecasts to 0.1%-0.2% in 2015 (prev. 0.3%), 1.2%-1.3% in 2016 (prev. 1.5%), and to 1.6%-1.7% in 2017 (prev. 1.8%)
- Uncertainty over ECB’s baseline growth scenario to increase, given doubts over health of global trade; expect Draghi to respond with “strong commitment” to ease further if price stability appears threatened

 
ABN Amro (Nick Kounis)

- Drop in oil prices, which will keep headline CPI lower for longer, is a key factor behind rising risk of action from ECB as soon as this week, Nick Kounis, economist at ABN Amro, says in client note
- Sees now much bigger risk that ECB will step up QE as soon as Sept. meeting; see probability of action at ~40% Draghi expected to step up dovish rhetoric

Deflation Fear Spurs Talk of More ECB QE – Bloomberg

From Deborah L Hyde at Bloomberg:

 

Market expectations for euro-area inflation have fallen back toward pre-ECB QE levels, sparking talk among analysts that Europe’s rate-setters may have to ease further.

 

Barclays (Cagdas Aksu)

- 5y5y fwd breakevens have cheapened globally over the past few weeks, and sensitivity to the oil price has increased.
- Oil’s fall will likely lead the ECB to lower its inflation projections on Sept. 3 staff projections, especially with EUR/USD struggling to cheapen.
- All of which means the bullish bias in EUR rates is unlikely to disappear as the ECB has little choice but to remain accommodative, if not increase its accommodation at some point.

 

JPMorgan (Greg Fuzesi)

- The ECB’s tolerance of downside surprises is low and it may step-up rhetoric.
- The ECB had started to go down this route in response to the Greek crisis and it may not take much for.

- It to say that an extension of QE beyond Sept 2016 is becoming more likely.
- If developments point to economic growth weakening as well, the ECB could move more quickly and consider stepping up the monthly pace of its QE purchases.

 

ING (Petr Krpata)

- The ECB will probably downgrade the CPI forecast given the fall in oil price.
- This will primarily cement the view that QE should be fully implemented until Sept.; for them to increase the program at this juncture, things would have to get really bad.
- Rising probability the ECB will implement QE fully isn’t enough to offset the repricing of Fed’s outlook, hence the EUR/USD rally.

 

Citigroup (Harvinder Sian)

- The cumulative impact on Europe CPI of a 10% RMB devaluation in 3Q 2015 is fairly substantial at 0.7% and pushes in the direction of lower for longer, at a minimum, but also more ECB easing
- Linkers can find few buyers in this environment and the miss in the market’s expected inflation versus – ECB projections is now too large for ECB credibility
- We think the ECB will not meet its inflation goal by Sept. 2016 and there are technical reasons why QE – will be extended and tapered until 2Q 2017
- ECB QE2 is also feasible.

 

In Greece, it’s not a “bank walk” but really a “bank run”

After midnight in Athens, Greek Prime Minister Alexis Tsipras called a referendum on July 5 on whether he should accept the latest demands of its creditors. In the meantime, Greek officials announced that banks will remain open on Monday and they don’t plan Capital Controls.

 

The only problem is that people know the referendum increases the probability of a Grexit in coming weeks as suggested by the latest quotes on Betfair (see below).

 

 

In this context, according to different sources on tweeter, Greek people really run to ATMs in order to withdraw their banking deposits. As a consequence, if the ECB is not ready to offer more liquidity to Greek banks, a major crisis including bankruptcies, is not excluded.
 

 

 

ECB QE Amount came Above Expectations with Low Risk Sharing and Legal Headwinds

The ECB unveiled a bigger than expected QE plan that will involve buying €60B a month including government bonds, covered bonds and ABS but excluding corporate bonds. The program scheme will begin in March and last until the end of September 2016; or “until the ECB sees a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2 per cent”. Therefore, it implies at least €1140B of purchases (19 x 60) so that the ECB balance sheet will exceed its 2012 top level in Sept. 2016 (previously than investors expected).

 

 

 

Assuming €10B a month of  ["covered bonds" + "ABS"] purchases, it implies €50B/ a month of sovereign bonds. In other words, in 2015, sovereign purchases should reach €500B which is almost 56% of Eurozone gross issuance and 2.3 times the net issuance. Through September 2016, the total amount of sovereign purchases would rise to €950B and will be based on the Eurosystem NCBs’ shares in the ECB’s capital key (and won’t exclude Greece).  Note that for Germany, the table shows that purchases through the end of 2015 will reach €129B which is more than 20 times the amount of the net issuance scheduled for 2015.

 

 

Moreover, the maturities of sovereign bonds purchased will range between two and 30 years and could offer negative yield.

 

However, after strong pressure from German and Dutch officials, national central banks will assume most of losses from any default or restructuring of their national debt, breaking with the tradition set by previous sovereign bond-buying schemes. There will be risk-sharing on only 20% of the assets, largely debt issued by European institutions bought by national central banks.

 

Finally, also on the negative side, the ECB QE is already facing legal headwinds in a context where the FT reported that:

 

Peter Gauweiler, a conservative MP who has launched multiple legal actions against the common currency, announced on Thursday that he had instructed a law professor to prepare a case against the QE programme.”

While government ministers refrained from comment, Werner Langen, a leading European Parliament member of Chancellor Angela Merkel’s conservative CDU, went on morning television to attack QE, saying: “This is wrong, it does not help, it is not the right instrument [ to aid economic recovery]. The ECB has reached the end with its monetary policy.”

 

Moreover, within minutes of Draghi’s announcement, deputy chancellor Hans Michelbach asserted that the ECB was “violating its mandate” while several hours later, Ifo economic institute President Hans-Werner Sinn says ECB’s bond-buying decision is “illegal and unsound state financing through the money-printing press.”

 

All in all, Draghi reassured investors by choosing both a monthly and a total amount above the consensus, including Greece and a large choice of maturities. Separately, in order to ease pressure from German and Dutch officials, he decided to cap risk-sharing on only 20% of the assets. However, it’s clear that it’s not sufficient and the QE is far from being implemented.