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Reminder: what are ECB’s tools? ⚒:
- forward guidance (currently calendar based)
- rate cuts
- QE (sovereign, agencies, corporates)* I’ll come back to this point
- bond re-investments (ppl often forget this one)
- forward guidance (currently calendar based)
- rate cuts
- QE (sovereign, agencies, corporates)* I’ll come back to this point
- bond re-investments (ppl often forget this one)
So... What’s priced?
- Market is pricing in 3bps cuts July, 13bps in Sep
What about QE? *tougher to estimate
- Barclays compare mkt reaction post Whatever It Takes to post-Sintra (not really 🍎 to 🍏 but ok) : strong rally already in periphs ; look at BTPs & 5y5y infl 👀
- Market is pricing in 3bps cuts July, 13bps in Sep
What about QE? *tougher to estimate
- Barclays compare mkt reaction post Whatever It Takes to post-Sintra (not really 🍎 to 🍏 but ok) : strong rally already in periphs ; look at BTPs & 5y5y infl 👀
If the ECB *do cut it will be a SIGNIF headwind for banks
See table below from GS banks team (Jernej Omahen) on impact of 20bp cut
Who’s at the bottom?Deutsche Bank & Spa/ Ita Banks
With no tiering,team estimate~ €5.6b hit, 6% EPS cut
BUT-Swiss style tiering mitigates by 1/3
See table below from GS banks team (Jernej Omahen) on impact of 20bp cut
Who’s at the bottom?Deutsche Bank & Spa/ Ita Banks
With no tiering,team estimate~ €5.6b hit, 6% EPS cut
BUT-Swiss style tiering mitigates by 1/3
“Since 2014 (when negative rates introduced) , banks have have “paid” the ECB €21bn, €7.5bn last year (80% by German, French, Benelux) “
No wonder UBS CEO Sergio Ermotti is so against further rate cuts 👇🏼
No wonder UBS CEO Sergio Ermotti is so against further rate cuts 👇🏼
And take a look at some of the Spanish banks (via @RaoulGMI)- reminder 👀 the ECB Vice President is Spanish De Guindos 👀
Ok what about a restart of QE?The issue here is technical as the ECB are already close/at 33% purchase limit for Germany & more for Nether
=>have to increase limit
Tables below from Jefferies with permutations:
e.g: limit increase to 40% at EUR30bn a month buys them 18mths 🇩🇪
=>have to increase limit
Tables below from Jefferies with permutations:
e.g: limit increase to 40% at EUR30bn a month buys them 18mths 🇩🇪
As an aside: there are no legal constraints for them to increase issuer limits since the #ECJ ruling
Would they consider buying bank bonds?Politically v tough but the universe is ~EUR 2.9T &would reduce banks funding costs even further
Possibly one for Lagarde to contemplate🧐
Would they consider buying bank bonds?Politically v tough but the universe is ~EUR 2.9T &would reduce banks funding costs even further
Possibly one for Lagarde to contemplate🧐
Bottom line- ECB is easing at a time when Fed is about to ease too.
BAML capture this predicament well re:correlation of real yield differentials vs $EUR
The ECB have to keep real rates low & will likely use summer months to figure out what the most effective package is
END
BAML capture this predicament well re:correlation of real yield differentials vs $EUR
The ECB have to keep real rates low & will likely use summer months to figure out what the most effective package is
END
