The ECB has revised downwards its growth and inflation forecasts. Furthermore, Draghi used very cautious tones during his press conference, stressing the existence of downside risks and trying to guide market expectations in the direction of further accommodation…..
Sign up for our free newsletter to receive weekly news from BONDWorld. Click here to register for your free copy
Intesa Sanpaolo – Research Department For professional investors and advisers only
– A strengthening of existing measures is a possibility in the event of further negative revisions to the scenario, or of an undesired tightening of financial conditions.
– For the time being, the only official opening is towards a lengthening of the programme, although other options cannot be ruled out.
– After having complicated the monetary policy scenario in the United States, financial turbulences in China have also hit home in Europe. Although it did not announce additional monetary policy actions, the ECB showed concern over the consequences on the European growth and inflation scenarios, and assured that it is ready to intervene if needed. Caution translated into a lowering of forecast growth (by -0.1 for 2015, and by -0.2 for 2016 and 2017) and inflation (by -0.2 for 2015, -0.4 for 2016, -0.1 for 2017), mostly prompted by the drastic revision of projected oil prices, but also by a marginal downward revision of underlying inflation, now forecast at 1.6% in 2017. The lowering of growth forecasts was explained by the slower growth of global demand, now forecast at +1.5% in 2015 and +3.3% in 2016. Also, the ECB President reasserted that the balance of risks is skewed to the downside, despite the latest revisions.
– Neither the introductory statement, nor the question and answer session, prospected the implementation of measures in the short term. On this topic, Draghi said that none of the members of the Governing Council asked to step up the flow of EAPP purchases. For the time being, the only official opening is towards a lengthening of the programme beyond the 2016 September completion date. While this has always been an option ever since the launching of the programme, it was explicitly mentioned in yesterday’s introductory statement. However, it would be absurd to rule out the possibility that, faced with a deterioration of the European cenario calling for further downside revisions to growth and inflation projections, or with an a undesired tightening of financial conditions, the may ECB also consider stepping up the flow of monthly purchases.
– A tightening of financial conditions may materialise for two main causes: an increase in medium-long terms interest rates driven by higher rates on the US dollar, or an appreciation of the euro on the currency markets. The euro’s exchange rate against the dollar underwent a violent albeit ephemeral movement between 20 and 27 August, which briefly placed it back in the 1.17 area. Should the Fed decide to start hiking rates, the ECB would not have to worry so much about the euro. By contrast, concerns over the reaction of medium and long term rates would increase, as they would be very likely to follow US rates upwards. Furthermore, the credit risk premium could surge to excessive levels.
– For what concerns interest rates, there is much talk in this period of a possible amplification effect stemming from the drying up of the flow of official government bond purchases, as a result of a deterioration of the balance of payments of the emerging countries, including China. However, the liquidation of reserves is being offset by private capital flows that must necessarily find an outlet, and which in a phase of mounting risk aversion may very well be invested in USTs or in European debt of high rating. This is confirmed by US Treasury data, based on which in the first half of 2015 central banks liquidated 91.1 billion dollars net in USTs, whereas net global purchases by non-residents amounted to 76.5 billion, as a result of private purchases well in excess of the sell-off by central banks. What’s more, this is taking place against a background of lower public deficits and net issuance.
Appendix
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.ch
Newsletter
