Ok, so Draghi was a dud. Which pardon the crassness, but anyone with any common sense knew he would be.
September is a month to preserve optionality- not to be a hero. This has been a year characterized by lost faith in central banks. See the movements in the yen for evidence. This wasn’t the time for boldness. Especially when you’re already monetizing sovereigns and corporates.
We’re not sure we buy (no pun intended) the whole “running out of things to buy” narrative. Draghi, like Kuroda, can buy whatever he wants. Be it IG corporates, high yield, or even stocks. There’s always more assets to monetize and trust us, as long as the ECB bid is there, they’ll be issuance whether corporate or sovereign.
Here’s Bloomberg’s Paul Cohen:
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Crown Holdings and Schaeffler have EUR and USD denominated deals on the table today, lifting Europe above EU30b for the week for the first time since July
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Galp Gas is a possible candidate for tomorrow, having completed a roadshow earlier this week, focusing on a EUR benchmark 7Y
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ECB day passed without incident, with Draghi announcing a review of the QE program to ensure it doesn’t run out of bonds to buy, the most notable piece of news
What’s encouraging - at least to us - is that the market took this in stride. Draghi actually went a bit out of character at the presser when asked about the monetization program and got noticeably irritated (and this is Draghi we’re talking about, so “noticeably irritated” means repeating himself) when pressed on the review of the ECB’s policies.
All the same, we think this is good for risk. We don’t need a former Goldman employee controlling the world. Which is why we’re moderately encouraged by this:
Frankly, that’s just not a big deal. You got a DAX dip early but this is a “mixed” session at best. In light of the circumstances, we’d almost call it bullish (now don’t get us wrong, we’re still in the skeptic category). Here’s Citi’s final take:
“The bottom line from today’s press conference was the GC is still assessing, but sees no need increase or change the stimulus program currently. That last emphasis is our own – and may become important over the fall. Any further actions will be dependent upon either weaker EZ data or hitting technical limits in the purchase program. We think there is a good chance for both in the next few months.”
“On the immediate horizon, stocks weakened for Europe, and all things equal should end up EUR positive (if you want to pick a cross, EURGBP should find renewed interest as the policy gap between ECB/BOE seems even larger now). We thought the market consensus headed in was for an explicit 6-month extension of the program. What the market got was an implicit signal to continue beyond March, if needed. When it came to PSPP, Draghi emphasized this is an open ended program, and will continue until the GC’s goals have been met.”
On the details:
· Rates were left unchanged (Main refi rate 0.0%, Deposit rate -0.4%, Marginal lending +0.25%)
· PSPP was left at 80bn/mo
· QE Horizon was left at “€80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”
· Despite resilience of EZ data so far, baseline outlook remains subject to downside risks.
· Forecasts were lowered mildly, and now stand at:
o GDP (2016, 17, 18): 1.7%, 1.6%, 1.6%
o HICP: 0.2%, 1.2%, 1.6%
"For the time being, the changes are not substantial enough to warrant a change in policy," Mr. Draghi said. ‘There is no question about the will to act, or the ability to do so.’
“Compared to expectations, this is somewhat of a damp squib. With neither growth or inflation shifting significantly, it will be difficult for the market not to assume short rates for end-2016 is somehow misguided (around 5bp, 10bps by June 2017). Draghi left enough optionality open for October or December should either the data undershoot or more technical limits of the PSPP are hit, but the general tone was very wait-and-see.”
“For the currency, this does leave it open to upside risks, as it has been holding in the top half of its range since July. There was no discussion about the rally of the trade weighted currency, of its impact on monetary conditions. “
Here’s the FX landscape:
And here’s how Goldman summed it up:
“ECB conference has ended. No indication of extension of the programme (beyond what the current statement includes) and no sign of how Bund scarcity will be addressed. That this scarcity is nonetheless weighing on the minds of GC members is clear from the announcement that committees will look at different options.”
You know really, at the end of the day, you kind of have to consign yourself to the fact that they can do whatever they want. Up to a point. And we’re not at that point yet. The Bank of Japan is almost there, but the ECB isn’t even close to its limits and the Fed isn’t either. Which may go some ways towards explaining why we’re only down fractionally into the close.