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As widely expected, the ECB has cut rates by 25bps, placing the refi rate at 0.75%, the deposit rate at zero, and the marginal refinancing rate at 1.5%. The decision was taken unanimously and was prompted by increased downside risks to the macroeconomic outlook throughout the euro area (including Germany), while risks to the trend of consumer prices remain well under control in the medium term. As specified by Draghi, the cut will reduce the cost of marginal refinancing operations, and will have a positive impact also on the cost of ELA. As regards the cutting of the deposit rate to zero, Draghi indicated that its effects will need to be assessed, as if on the one side the measure should discourage the parking of liquidity in the deposit facility, on the other it reduces margins for banks.
Beyond the interest rate cut, and as in part we expected, no indication was given that the ECB could announce another long-term refinancing operation in the near future. Draghi said that at the moment the ECB “will not commit to any further non-standard measures”, also because there are no interventions that may be considered as effective throughout the euro area, and that lingering fragmentation within the area may be in part managed more effectively through the new rules on collateral (June 28), based on which credit claims and lower-quality ABS and RMBS qualify as eligible assets, allowing access to ECB liquidity also to troubled credit institutions. Failure or delayed transmission to credit of the LTROs is in part tied to national factors.
As regards the outcome of the European Summit, Draghi stressed that the decisions taken, and the commitment to draw up by the end of the year a road map that will enhance European integration and head towards a monetary and fiscal union, is a sign that the euro “is meant to last”. The transfer to the ECB of banking supervision powers is a very important result. For the time being the Commission has only presented a preliminary document, but the ECB expects further indications and a higher level of democratic accountability. The new functions will have to be carried out effectively, rigorously and in full autonomy, so as not to compromise the reputation of the central bank.
Draghi said “we have to make it do”, referring to the firepower of the EFSF and ESM, and that in any case the resources should be adequate to manage any emergencies. In any case, recourse to the European facilities must be within the agreed framework (see WEM of 4 May 2012). Draghi pointed out that the “flexible use of resources” referred to in the summit communiqué does not mean that assistance will be not subject to strict conditionality, as conditionality is the only way to guarantee the credibility of these measures. Draghi once again stressed, and firmly so, that that the ECB intends to operate within the limits of its mandate, and that the best contribution the central bank can make towards growth is price stability. The ECB still has at its disposal many weapons to guarantee full achievement of its objective, moving in both possible directions, as specified.
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.
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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.
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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
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