Have markets grown overconfident about QE? ----------------------------------- The most strikingly nuanced headline this morning came, unusually, from the Huffington Post Italia: “markets dissatisfied with Draghi, and impatient with Renzi”. The stock exchanges in Milan and Paris were down 3.9% and 2.8% respectively. The Stoxx 600 was down 2.4%. Mario Draghi’s press conference was a bit of a downer, not in objective terms, but compared to what was expected. He did seem to row back a little on the target for the expansion of the ECB’s balance sheet. It is fair to assume now that the ECB does not have a €1tr target. At the press conference Mario Draghi not only talked about a level comparable to the beginning of Q1 2012, as he already did in the European Parliament. He also made clear it is not really a target, but an instrument, and he quite explicitly refused to be more specific. The consolidated balance sheet of the euro system was €2.04tn as of 26 Sept. It was €2.69bn as of 6 Jan 2012, rising to over €3bn by March that year. So that gives a range of between €650bn and a little over €1tr. The importance is that with these figures you cannot logically deduce that Draghi will need QE to hit his balance sheet target, as some market participants may have done. QE is, of course, still possible (and probable in our view), but not logically inevitable. The ECB gave some sketchy details about the Covered Bonds Purchase Programme (CBPP) and the ABS Purchase Programme (ABSPP). Draghi confirmed what had been reported earlier, that the ECB will buy Greek and Cypriot senior tranches, even though the ratings are capped by the country rating, which would otherwise be insufficient. The idea is to neutralise the risk through four “mitigants”. Draghi specified that these were calculated to be “risk-equavalent”. First, there will be a monthly reporting of the underlying credit pool, and of asset characteristics. Second, there is an over-collateralisation requirement of 25%; third, currency hedging for non-euro claims is subject to BBB minimum rating for counter-parties; forth, claim must be against debtors domiciled in the eurozone. Under the ABSPP the ECB will not buy structured securities (even though they remain eligible as collateral). The qualifying assets should have an underlying credit pool that is at least 95% euro-denominated, and 95% eurozone-resident. Except in the case of Greece and Cyrpus, the minimum second-best credit rating is BBB-/Baa3/BBBl. From the press conference in Naples, we also noted a more nuanced assessment of future inflation. Draghi has explicitly acknowledged that inflation expectations have fallen, especially for short-term horizons. He also noted that the 5y/5y swap was eight bp below 2%, something he said the ECB was looking at with great attention. There was further bad news on the economy from Eurostat, which reported a 0.1% mom fall in producer prices in August (annual prices: -1.4%) night xx
Posted on: Fri, 03 Oct 2014 22:19:27 +0000
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