Viewpoint : In our view, a further 25bp cut of the refi rate, in July at the latest, is very likely

Sign up for our free newsletter to receive weekly news from BONDWorld
Click here to register for your free copy 

For professional investors and advisers only

Risks to the macro scenario have eased only marginally this month and Draghi, at the May meeting, signalled that the ECB “stands ready to act if needed”. While a refi rate cut by the summer is very likely, we think a negative deposit rate will not meet an ample enough consensus within the Council in the short term, and that it would be in any case subordinated to a refi rate cut. In our view the ECB is unlikely to have already finalised the joint plan of action with the EIB to revive credit to small and medium enterprises.
– Since last April, the ECB has committed, through a verbal guidance of sorts, to keep its “monetary policy stance accommodative for as long as needed”. Following the May cut, Draghi signalled further easing of the refi rate might have followed, Draghi also stressed that “the ECB is ready to deal with the unintended consequences” of a negative deposit rate if needed”. The ECB also announced it is working on a joint plan of action with the EIB aimed at easing credit to small and medium enterprises. Thus, this is the menu of instruments the ECB may activate if needed: prolonged weakness of the macro scenario, and defective monetary policy transmission.
– In our view, a further 25bp cut of the refi rate, in July at the latest, is very likely. The May statement indicated that the ECB would “monitor very closely all incoming information on economic and monetary developments”. The wording, à la Trichet, anticipated both the July 2012 and last May refi cuts. Also, during the press conference Draghi signalled that a 50bp cut had also been discussed, and that the ECB “stands ready to act if needed”. Risks to the macro scenario have eased only marginally in the past month. In May, the national confidence indices and PMIs recovered only in part the decline observed over the two previous months, and remain at depressed levels. For the time being, no data on industrial output, exports, and orders area available for 2Q 2013, it is thus hard to confirm the expectations for a recovery in the area euro during the Spring. A cut, therefore, cut come already next Thursday. However, the ECB could decide to wait until July and to prepare a cut of the refi rate to new all-time lows with the publication of its growth and inflation outlooks. We expect GDP growth estimates to be revised downwards to -0.7% (from -0.5%) in 2013, and to +1.0% (from +1.2%) in 2014. The inflation outlook is expected to remain broadly unchanged.
– In our view, the probability of a further cut of the deposit rate into negative territory remains lower than 50%, as discussed in detail in our WEM of 24 May 2013. In any case, a deposit rate cut would only come after the refi is adjusted.
– As regards non-standard measures, a reduction of the haircut applied on loans to small and medium enterprises by the summer seems unlikely. The measure could ease residual liquidity constraints for some banks (probably of small and medium size), but is highly unlikely to prompt an increase in lending, also considering that the assets would remain on the balance sheets of the credit institutions. We think the measure could meet with sufficiently broad consensus within the Council only if the risk associated with the measure is borne ultimately by national central banks, rather than by the ECB.
– A credit easing programme managed jointly with the EIB could be launched by the end of the summer, but we doubt the ECB has already finalised the details. We have already expressed our doubts on the effectiveness of a measure of this kind (see WEM of 24 April 2013), as the main obstacles hindering the concession of new credit are macroeconomic risk and the drop in demand for loans. A plan to purchase securitisations of loans to small and medium size enterprises could in any case help revive the ABS market, freeing up equity capital for undercapitalised institutions. Whether the measure will meet with sufficiently broad consensus within the Council will depend on who will ultimately bear the risk tied to the operation.

Analyst Certification
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.

Important Disclosures
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).

Valuation Methodology
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.

Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.

Source: BONDWorld – Intesa Sanpaolo – Research Department