Tue. Feb 18th, 2020

Draghi's penultimate: scare or death

Rosalía Sánchez


It is not the first time Mario Draghi uses this play. Based on repeating it, in fact, it has become a classic. It consists of announcing, pulling over, a measure to debate in the council. The markets, then, rush to discount it. And, as a consequence, the opposition in the council squashes to avoid the frightful falls in stock market that would cause the trigger and the Italian gets away with it. True to the style that he himself has created and at his penultimate meeting at the head of the ECB, Draghi today to Frankfurt to respond to the greater expectation of stimuli generated during his tenure. The point is that this time, the drawn out picture of negative rates could itself cause such a scallop in the quotes of the banks that the financial sector seems forced to choose between scare or death. Draghi will have to find the exact words to meet expectations without loading a level of life support for the entities and the ECB has already leaked information about a possible delay in the launch of the measures. But say what you say and do what you do, the final betrayal of your mandate is assured and you will be leaving an ECB that neither your founding parents would recognize.

"In case interest rates are cut, Draghi will have to throw a bone at the bank if he wants to save himself from the riot," says Mati Greenspan, senior analyst at eToro, noting that he will be forced tomorrow to approve some additional measure to relieve the pressure exerted on banks by ultra-low interest rates. Greenspan stresses that "most banks are very frustrated with the low-rate policy that directly affects their profits" and warns of the sudden change in the trend in the bond market, where interest rates have started to rise sharply in September. «Since we still don't know the cause of this movement, most investors are taking a cautious approach. A misunderstanding can lead to the wrong decisions, so until a dominant narrative emerges, it is better to limit exposure to key assets.

In the last two weeks, we have seen positions in the most cyclical and punished sectors of equities. In just two weeks, for example, the interest of the Spanish bond has skyrocketed from 0.02% to close to 0.30%, pending the Draghi token movement. The correction in European public debt has accelerated and analysts value the possibility that the ECB will finally be more restrained than expected weeks ago. The expectations of an aggressive battery of new monetary stimuli have cooled significantly and the euro traded very flat yesterday, paralyzed by uncertainty. “The low volatility of the single currency could be attributed to the uncertainty generated by the policy meeting of the European Central Bank. Markets expect Draghi to announce a new stimulus package; However, the form that it will take has generated much speculation among investors and analysts. A cut of at least 10 basis points of the interest rate is discounted, but the design of the compensation mechanism that will accompany this measure remains in the area of ​​doubt, ”explained Monex Europe analysts.

“Among the probable announcements are a reduction in rates, a new multi-level deposit service for banks and a greater orientation of expectations, but We do not expect the launch of a new asset purchase program given the lack of consensus among the members of the ECB, ”says Franck Dixmier, Global Director of Fixed Income at Allianz Global Investors. He undoubtedly refers, among other opponents, to the president of the German Bundesbank, who has even granted an interview asking not to "panic" and "activism." During the July 25 meeting, the ECB validated the approach that Draghi outlined in Sintra, Portugal, a month ago and was willing to take all necessary measures to preserve growth and approach its inflation target of 2%. The ECB teams were then given the mandate to examine all monetary stimulus options, including the restart of their bond purchase program. But Weidmann has made it clear that that does not mean putting them all into practice and is speaking on behalf of the country's central bank that this same quarter is very possibly entering a technical recession, which means that, although Draghi is backed by macro data , your design will be subjected to a German polishing operation.

And, in any case, for a new bond purchase program (QE II) to have an impact, the ECB could be forced to revolutionize the parameters under which QE I has been governed, such as the 33% limit of bonds of the same issuer. Nadia Gharbi and Frederik Ducrozet, economists at Pictet, "expect the issuing limit to be increased from 33% to 50%" and a size of 600,000 million euros, which could be distributed in purchases of 50,000 million euros per month in 12 monthly installments or in 18 months reducing the monthly amount to 30,000 million. Shweta Singh, an analyst at TS Lombard, underlines that this flexibility would allow the central bank to buy 1.5 billion euros more of sovereign bonds, which would increase the size of the current program by more than 50%.

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