Capital Markets brief timeout is now over now that US Independence Day has come and gone. Let’s get down to the meaty work of guessing what Cbankers have in store for us. This is shaping up to be a big day with BoE, ECB and ADP front and center over the next few hours. So far this morning, the EUR has remained lackluster outright, apart from the intermittent knee jerks, many investors have chosen to stay on the sidelines ahead of key rate announcements and bond issues. Will the BoE and ECB make any bold moves in the next few hours to stimulate the UK and euro-zone economies?
The consensus forecast are for the BoE to keep its key rate unchanged at +0.5% but to increase its asset buying program by +GBP50b to +GBP375b. It’s anticipated that the ECB is to deliver a conventional response to the recent deterioration in euro macro data, cutting its repo rate target by-25bp to +0.75% and dropping its deposit rate to zero. Currently futures traders do not seem to have fully priced these rate cuts into the market. Despite this, investors are anticipating a similar type move and if true, can we expect only a modest positive reaction in risk assets?
Deep down, there is an increasing hope that the ECB may deliver more. The summer of quiet discontent may end up proving fruitful if euro policy makers finally decide to become more proactive. Currently, they are beginning to lose the initiative as the euphoria following the European Union summit last week has started to become weaker. Just looks at this morning Spanish auction. Investors appetite for periphery product appears to be again on the wane as the long road to recovery looks increasingly volatile.
As we write, the EUR is again under pressure on euro periphery auction results. Despite the Spanish treasury having managed to sell the allotted +EUR3b it was targeting across the three issued lines of Bonos, it has come with a price. The final tally reveal a soft auction that has managed to deliver some “longer†tails after selling +EUR1.239b in the 3’s (btc 2.3 vs. 3.01), +1.015b in the 4’s (btc 3.57 vs. 3.16) and 10’s (3.2 vs. 3.29). Yesterday’s Spanish and Italian data just did not give investors any degree of confidence going into today’s auctioned issues. There is a glimmer of hope, Ireland held its first debt sale in 18-months (+EUR500m 3-month T-bill), although a short issue, it did go well.
The summers soundbites will come from today’s announcements. Is the ECB prepared to take the fight to the market or in typical euro bureaucratic fashion will they manage to take their foot off the gas again? If the BoE is to announce a further +£75b of QE (more aggressive side) it would take their holdings of gilts to +40%. There is a possibility of a +£50b QE this month followed by a further +£25b next. Their stronger rhetoric in their recent minutes suggest that they could err on the more accommodative side. How will the pound fare in EUR rate divergence? Investors will expect Sterling to remain safe haven tops for now.
Even with the downside EUR pressure continuing, the retail investors is quietly buying the EUR market here. In contrast, most of the recent bear activity has them chasing the market as they retrieve their prices and place lower offers. The current consensus is looking to use intraday corrective upticks as fresh opportunities to resale this market while targeting the low 1.24’s. Without promise of further easing by the ECB this morning, a-25bp cut may see the single currency retest the 1.26 handle again. A-50bp ease could see a huge swing to the left, quickly testing 1.2375 psychological level. A shock will be a “no†change and that will give us an initial spike. With the ongoing investor damage to risk appetite most EUR gains should unlikely be sustainable.
