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23 Oct 2015
Dovish ECB signals more easing, market rally marches on – Deutsche Bank
FXStreet (Delhi) – Research Team at Deutsche Bank, suggest that the ECB message was more dovish than we expected and it did not announce a new policy but it went as close as possible to pre-committing to a December policy easing – by highlighting the risk of a slower return to the inflation target and signaling that the Governing Council is gearing up to act (imminently).
Key Quotes
“We think that the ECB will decide on 3 December to increase its policy accommodation with mutually reinforcing moves: extending the duration of QE by six months and a 10bp depo cut, and that the whole corridor will be moved in line with the depo cut. This would mean a 10bp fall in the refi rate. We expect the ECB to change the TLTRO conditions to avoid potential counterproductive effects.”
“Risk markets got a significant lift by the ECB statements, as S&P 500 rose by 1.7% and the recent rally has almost brought the index back to the levels last seen in mid August, almost completing a full retracement. The EUR fell by 2% against the dollar, while major commodity currencies and most EM currencies gained across the board.”
“In our view, the extended easing scenarios – now enhanced by ECB - are supportive of the markets, but EM assets will likely be a laggard in relative performance given fundamentals’ hurdle and continued uncertainty in the commodities markets. Differentiation remains key as only countries with relatively more sound fundamentals will be able to benefit from the external push (Brazil and the likes, on the other hand, are likely to still be mired in its own troubles).”
“Within EM, we continue to favor credit over FX, as the latter is more affected by poor global growth dynamics (the reason for the easing) and the likely continued strengthening of the dollar, while keeping selective receivers across EM rate curves.”
Key Quotes
“We think that the ECB will decide on 3 December to increase its policy accommodation with mutually reinforcing moves: extending the duration of QE by six months and a 10bp depo cut, and that the whole corridor will be moved in line with the depo cut. This would mean a 10bp fall in the refi rate. We expect the ECB to change the TLTRO conditions to avoid potential counterproductive effects.”
“Risk markets got a significant lift by the ECB statements, as S&P 500 rose by 1.7% and the recent rally has almost brought the index back to the levels last seen in mid August, almost completing a full retracement. The EUR fell by 2% against the dollar, while major commodity currencies and most EM currencies gained across the board.”
“In our view, the extended easing scenarios – now enhanced by ECB - are supportive of the markets, but EM assets will likely be a laggard in relative performance given fundamentals’ hurdle and continued uncertainty in the commodities markets. Differentiation remains key as only countries with relatively more sound fundamentals will be able to benefit from the external push (Brazil and the likes, on the other hand, are likely to still be mired in its own troubles).”
“Within EM, we continue to favor credit over FX, as the latter is more affected by poor global growth dynamics (the reason for the easing) and the likely continued strengthening of the dollar, while keeping selective receivers across EM rate curves.”