Near-term #ECB quantitative #easing unlikely

Analysts polled by Reuters expect the ECB to spend EUR300bn on asset-backed securities and covered bonds over 2 years. The central bank is set to release the details of this new program on October 02. Interestingly, the same poll showed that economists gave 40% probability of the ECB conducting sovereign bond purchases.

Many market participants think that the ECB couldn’t expand the balance sheet by EUR1tn with ABS buying and TLTROs alone. The low uptake of the first TLTRO reinforced such a view.

Draghi has left the door open to further easing but the central bank may prefer to assess its previous easing steps before announcing new measures.

Source: FxWire Pro
Annunci

Prospect of #ECB quantitative #easing increases

Analysts polled by Reuters expect the ECB to spend EUR300bn on asset-backed securities and covered bonds over 2 years. The central bank is set to release the details of this new program on October 02. Interestingly, the same poll showed that economists gave 40% probability of the ECB conducting sovereign bond purchases.

Many market participants think that the ECB couldn’t expand the balance sheet by EUR1tn with ABS buying and TLTROs alone. The low uptake of the first TLTRO reinforced such a view.

Draghi has left the door open to further easing but the central bank may prefer to assess its previous easing steps before announcing new measures.

Source: FxWire Pro

#ECB determined to stimulate through easing steps #Draghi

In a surprise move, the ECB cut its main refinancing rate to +0.05% from +0.15%, alongside lowering its deposit and lending rates. This move should encourage euro-zone banks’ participation in the first TLTRO.

Market participants were expecting Draghi to provide more clarity on the timing of QE but the rate cut took them by surprise, as evidenced by a sharp drop in the euro.

EURUSD saw a free fall, setting a fresh-14 month low, while EURJPY fell below the 137 handle. Unsurprisingly, euro-zone bond yields also declined.

The ECB also unveiled a plan to buy ABS and covered bonds, though the size of the program was not given, and said that it would provide the further details about that on October 02.

Reuters reported early today that the size would be something around EUR500bn. Draghi predicted that TLTROs and the ABS program will have a significant impact on its balance sheet.

Today’s decisions underlined that the ECB is determined to stimulate flagging economic conditions through easing measures. This could mean that the euro will continue to remain under pressure while euro-zone yields will stay near record lows.

Draghi says:

“We took into account the overall subdued outlook for inflation, the weakening in the growth momentum in the recent past. The Governing Council sees the risks around the economic outlook on the downside.”

Source: FxWire Pro

#ECB to stick to its accommodative stance

Euro-zone bond yields and the euro declined ahead of the ECB meeting. The markets are divided over the ECB’s actions on Thursday. The ECB may cut the refi rate in order to encourage banks’ participation in the first TLTROs, or it may wait to assess the impact of its previous measures.

If the ECB holds off on fresh monetary easing on Thursday that will trigger a short-covering rally in the euro (so will Draghi’s less dovish stance) and be negative for euro-zone bonds.

KBC strategist Piet Lammens says:

“Given the rally in the past month and only a small correction in the past few days there is scope for a bit of downside in bonds unless he comes with something straightforward like a confirmation that indeed the whole council thinks inflation expectations are de-anchored.”

The ECB is unlikely to change its accommodative policy stance at anytime soon, especially as inflation remains weaker (Draghi himself acknowledged that inflation expectations are falling).

That means that the euro’s downtrend will remain intact even if ECB announcements fall short of expectations today and that bond yields will continue to stay near record lows.

Barclays strategists think:

“However … we expect the market to keep pricing in the ECB’s commitment to its accommodative monetary policy stance, expecting more actions in the coming months in the form of QE, meaning that any increase in volatility after today’s meeting would be temporary.”

Source: FxWire Pro

#Eurozone #stagflation vis-a-vis #ECB #monetary #policy

he European Central bank meeting on Thursday is the prime event for markets seeking clarity on the bank’s response on Deflation in the euro zone.

Euro zone inflation weakned to 0.3% in August, well below the ECB 2% target, raising fears that Europe is sliding towards deflation.

Impact of Ukraine crisis on Europe

Increased Geo political risks from conflict in Ukraine forced Europe to sanctions on Russia. Russia is third biggest trade partner of Europe.

Russia is the fifth largest importer of food after EU, US, China and Japan. Russia is major buyer of European fruit and vegetables.

The EU takes more than 45% of Russia exports but only 3% of EU exports go to Russia.

This sanction on Russia will further reduce the Growth of EU.

Unemployment

ECB president Draghi in Jackson hole economic policy symposium highlighted the role and importance of unemployment in guiding monetary policy decisions.

Reasons for the unemployment are the long recession. The rapid unemployment increase since 2008 can be attributed to two consecutive economic recessions.

The first increase in unemployment occurred after the Great Recession in 2008 which impacted the U.S. and world economies. The 2008-2011 Icelandic financial crisis hit the Euro zone.

What to expect from ECB

Interest rate cut

A cut in all key interest rate by a further 10 basis points, delivering negative deposit rate (-0.2%) and as well as refinancing rate (0.05%).

Other Securities Buying

The market for High quality ABS is small in euro zone. It should buy other securities to the mix such as Mortgage backed securities and corporate bonds. Weakened inflation and Poor growth paved the way for border based asset purchase including government bonds known as Quantitative easing.

The currency markets will have good impact only if ECB introduces new supportive measures such as buying asset backed securities such as the government bonds. The EURO has declined drastically in the past one week because ECB might introduce QE measures like Japan.

Any policy inaction by ECB will reduce volatility and also weakness of EURO currency.

Source: FxWire Pro

Falling euro-zone bond yields make Euro less attractive

The recent data out of the euro-zone pained a gloomy picture, fuelling speculations that the ECB will expand its stimulus plan. 10-yr yields from Spain to Germany fell to record lows, as market participants expect the ECB to announce some form of easing steps when it meets on September 04, 2014.

Felix Herrmann, an analyst at DZ Bank AG in Frankfurt, says:

“It’s pretty straight forward; more and more investors are expecting something big to be announced at the beginning of September.”

The Spanish yield spread with bunds fell sharply as a plunge in yields on the latter prompted investors to hunt for relatively higher yields.

For the same reason, Italy’s yield spread with bunds also narrowed. Interestingly, market participants don’t pay much attention to fiscal conditions of Spain and Italy as they hope that the prospect of ECB easing should protect the value of their investments in those countries’ bonds.

The fall in euro-zone yields make the euro less attractive to traders, and the single currency is expected to decline further.

Commerzbank forecasts:

“EUR/USD has so far slipped to an August low at 1.3153 while en route to the 1.3105 September low and the psychological1.3000 region”.

Source: FxWire Pro

S&P 500 Closes Above 2,000 For First Time

Global markets continued to march higher again today as more forecasters upgraded their calls for easing at the ECB meeting next Thursday. JPMorgan followed Nomura’s call yesterday for a rate cut to make the new long-term loans provided by the ECB more appealing for banks. The S&P 500 (SPX) closed above 2000 for the first time by a scant four pennies. Energy stocks put in another strong performance today – the best sector in the index. Trading volumes continue to be light. The prior two days of trading on the NYSE were the lowest non-holiday sessions of the year by a wide margin and today only barely surpassed those levels.

Burger King (BKW) announced the final terms for its $11.4 billion acquisition of Tim Horton’s (THI). The new company would be headquartered in Canada to avoid US corporate tax laws. Members of Congress were not thrilled with this evolution and had some choice words to say about the deal. Warren Buffett provided $3 billion in preferred financing at a 9% rate. The rest of the deal was closed in cash and common BKW stock.

July durable goods orders rose 22.6% from the prior month thanks to the largest single month change in aircraft orders. Last month the Farnborough airshow in the UK featured a record number of aircraft orders for Boeing and Airbus, and it was reflected in this month’s report. Economists had been expecting a gain of 8%.The prior month’s 0.7% gain was revised up following the Commerce Department’s quarterly revision. After excluding these orders, durables fell 0.8% versus 0.5% expected. The Conference Board gauge of consumer confidence rose to 92.4 (versus 89.0 expected) the highest its been since late 2007.

There are no major US economic reports scheduled for tomorrow in the US. The MBA will release its weekly index of mortgage applications in the morning. In the early afternoon the Treasury will sell $13 billion of 2-year floating-rate and $35 billion 5-year notes.

The only economic events on the calendar for the rest of the world is the German GfK household consumer confidence survey and a similar one from MNI in China. In conjunction with the rising tensions between the EU and Russia, where Germany is the most economically exposed, confidence is expected to drop.

Earnings tomorrow are mostly from retailers. Express (EXPR), Michaels Co (MIK), Lannett (LCI), Workday (WDAY), and Tiffany’s (TIF) will report.