The day has arrived, which traders have been waiting for eagerly- The ECB Press Conference. What does this mean for the market, and if the ECB can deliver what they have promised, are just some of the most faddish quest amid traders. Fears of imminent recession do appear somewhat a touch hasty, but it does not mean that we are out of the woods yet. The ECB still need to fix the Eurozone neck breaking problems after years of stasis and there has been very little fruit for their labour. The bank has been treading immensely cautiously and making sure that any spill over effects does not impact their balance sheet, because the failure of the ECB bank ostensibly means collapse of the Eurozone.
If we cast our minds back to the December meeting and the affair which becomes vividly apparent is that expectations are astounding again. Although, many argue that the ECB members have created much noise at this instance, but again the colours were filled by the president of the ECB – Mario Draghi, who has very much laid out his plan earlier.
Today’s meeting is not only conspicuous, because we have the possibility of more quantitative easing- certainly not, the significant of this meeting is very much reliant on the ECB’s artistry to benchmark the health of the economy. The bank will be using all of their neoteric guidance, and given that the sell off in oil has bottomed out- at least for the time being, the bank should be able to handle headwinds much better.
A lot is expected from the ECB and some of it is very much priced in the market. The element of bank using the two tier interest rate system- a similar one to the Bank of Japan, and inflating their purchase of more assets, will not jolt the market. What investors have positioned so far is that the bank could be evoking a system under which it pushes the deposit interest rate by 10 basis points for existing excess reserve and another 10 basis cut for new excess reserve.
The element of anxiety that cutting the deposit rates further, in an environment when banks are already struggling with their earnings, and slow global growth, will elevate the volatility in the market. The fact is that we are trading in uncharted territory and no one can audibly say what the end result could be and if the cost of this will trump the benefits it will bring. Yes, you could always use the alibi that a few other countries have adopted this strategy, but yet we have not seen the end game for them. The rout in the financial sector, which we experienced a few weeks ago could return with vengeance.
The final bazooka will be incrementing their monthly purchase power from 60 billion euro to perhaps 70 billion euro, which the bank did crave to trigger the last time, but due to minority votes, they were pushed away. Some have made noise that if the ECB acutely wants to dominate the outlook, then perhaps a round number of 100 billion can comfort them. However, a mammoth puzzle is that they do not have much products which can mount to this amount. Therefore, it will be of no curiosity or jolt if the bank redesign some of the elements of their QE program. The German 6, 4 and 2 year yields are all trading below the ECB target of -0.3. To become completely bold, there is an element that the ECB may stun the market by entirely removing the clause which circumscription their capacity to purchase.
Disclosure & Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.
by Naeem Aslam