Bloomberg
Published Jul 23, 2019 00:00
Updated Jul 23, 2019 01:53
Markets Are More Wary of a Surprise ECB Cut Than Bond Pundits
(Bloomberg) -- For currency and bond strategists, this week’s European Central Bank meeting is all about laying the groundwork for September. Yet traders are more wary of surprise action.
Money markets are pricing in a 40% chance of a 10-basis-point rate cut at Thursday’s meeting, while debt markets have surged to records since President Mario Draghi raised the prospect of fresh stimulus last month. Most analysts, however, expect the ECB to hold fire this week to see the extent of a predicted cut by the Federal Reserve next week and whether economic data recovers.
Subdued inflation expectations mean that for markets it’s just a question of when the ECB unleashes a wave of easing that may include an interest-rate cut and a re-start of its asset-purchase program. Investors will also be watching to see whether the ECB raises its limits for the buying of bonds, or alludes to any further plans to tier the deposit rate to ease the squeeze on bank profits.
“We even think there might be some more substantial measures in the ECB’s pipeline to maximize its effect by surprising the market,” said Esther Reichelt, currency strategist at Commerzbank AG (DE:CBKG). “It might be worthwhile for the ECB not to wait until September and potentially face adverse currency effects.”
Draghi has surprised markets before, saying on June 18 that action will be needed “in the absence of improvement” in inflation. That was different from the ECB Governing Council’s meeting only two weeks earlier, when he said action would be needed in the event of “adverse contingencies.” He reversed rate hikes at his first meeting in November 2011, extended quantitative easing longer than expected and looks set to end his tenure with more easing.
Those expectations have driven yields across the continent into negative territory, with Belgium the latest to persuade investors to pay to lend it money for a decade this week, and Spain a favorite for QE bets. On the euro, options have turned mildly positive for the next six months as the Fed is expected to outdo the ECB’s easing, yet the wide range of forecasts shows that the main thing needed is clarity.
Here are views from strategists on the markets and the ECB:
Goldman Sachs (NYSE:GS) (Favors Spain, Portugal)
Commerzbank (Preemptive Strike)
Credit Agricole (PA:CAGR) (Upside Euro Risk)
JPMorgan (NYSE:JPM) (Take Profit)
BMO Capital Markets (Short Euro)
NatWest Markets (Summer Restraint)
Written By: Bloomberg
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