{"id":862,"date":"2012-01-12T08:10:00","date_gmt":"2012-01-12T08:10:00","guid":{"rendered":"http:\/\/starthostunlimiteddmffassi-ss.stackstaging.com\/bondworld.ch\/home\/sites\/20b\/7\/760c69a11c\/public_html\/investmentworld.ch\/index.php\/2012\/01\/12\/ecb-pausing-for-breath-at-year-start\/"},"modified":"2012-01-12T08:10:00","modified_gmt":"2012-01-12T08:10:00","slug":"ecb-pausing-for-breath-at-year-start","status":"publish","type":"post","link":"https:\/\/www.investmentworld.eu\/ch\/ecb-pausing-for-breath-at-year-start\/","title":{"rendered":"ECB: pausing for breath at year-start"},"content":{"rendered":"

<\/span><\/span>The January ECB meeting will bring no important developments. The ECB will stay active in terms of the SMP, without changing its intervention strategy provided no dramatic event for the stability of the euro system takes place. Any announcement of non-conventional measures seems unlikely before the second thee-year fund auction due at the end of February. Official rates may drop below 1.0% if \u201csubstantial downside risks\u201d on growth estimates (0.3%) should materialise, but a cut is unlikely this month, in our view….. <\/strong><\/p>\n

<\/span><\/span><\/span><\/p>\n

<\/span><\/span> <\/p>\n

<\/span><\/span><\/span><\/p>\n

On hold after the December measures\u2026<\/strong> <\/p>\n

We do not expect particularly noteworthy news from Frankfurt on Thursday, as the ECB put in place unprecedented measures at its December meeting. The 36-month auctions, the actions taken on allocable assets and on bank reserves, will significantly ease the funding problems faced by banks, in particular in peripheral euro area countries. The first three-year auction, held on 21 December, met with demand for EUR 489Bn in funds (although EUR 45.7Bn were cashed back in from the one-year operation launched in October). Last December\u2019s operation also triggered a surge in the ECB\u2019s balance sheet, which rose to 30% of GDP from 18% at the beginning of 2008, as opposed to the Fed\u2019s balance sheet of around 19% of GDP. However, the ECB less than doubled its balance sheet in relation to GDP since the beginning of 2008, while the Fed\u2019s tripled. Therefore, the ECB would still seem to have a margin for further intervention, resorting more to the purchase of government bonds, following the example of the Fed and the BOE.<\/p>\n

The 36-month operation carried out in December triggered a surge in excess liquidity, to EUR 483Bn (22 Dec. 2011), which then eased in part to EUR 413Bn (08 Jan. 2012). Excess liquidity led in turn to a significantly stronger recourse to the deposit facility, up to EUR 481Bn on 10 Jan. 2012, although this does not mean that the operation had not impact on financial conditions in the euro area. In addition to compressing money market rates, that will continue to drop, more importantly the ECB has eliminated refinancing risk for European banks this year, and cooled cost of funding, with much stronger implications on the cost and availability of credit than would have been the case for an official interest rate cut.<\/p>\n

The announcement of further 36-month operations by the ECB in 2012 cannot be ruled out, and the purchase of covered bonds may also, or alternatively, be stepped up. In order to tackle a potential lack of guarantees, the ECB could further slacken criteria on viable security, admitting also assets with ratings lower than A- and\/or accept unsecured bank loans. However, we believe the ECB will at least await the outcome of the auction on 28 February, before adopting any further non-conventional measures.<\/p>\n

\u2026 which may also indirectly improve refinancing conditions for governments<\/strong>
Indirectly, the measures put in place by the ECB have also eased pressures on government bonds, aiding in particular a sharp drop in short-term yields in Italy and Spain. Additional benefits could come with the next 3-year auction on 28 February, especially if banks further increase their exposure to the government bonds of peripheral countries, taking advantage of carry trade opportunities offered by the market.<\/p>\n

ECB to remain active on SMP, but no change expected in terms of action \u201cstrategy\u201d and communication<\/strong>
The ECB will continue to use the SMP, although along the same lines as in the past four months and more intensively in the run up to the refinancing auctions (the drop in purchases over the past three weeks is explained by a less intense calendar of issues compared to the previous months). However, we stick to our view that the ECB will not implement an actual round of QE, barring a dramatic turn of events that would risk entirely compromising monetary policy transmission and the stability of the euro system. The reasons for this are still ideological, regardless of the fact that a structured purchase program, transparently announced, would have more or less the same effect on the ECB\u2019s balance sheet, while boosting confidence to a much greater extent. An explicit communication from the ECB would be enough to dissipate doubts over the financing capacity of Italy and Spain.<\/p>\n

There is a possibility that the ECB may be forced to act more pervasively in support of government bonds, in case of tensions leading up to the refinancing auctions to be launched by Italy and Spain in the next three months, given in particular the obstacles still hindering the EFSF II\u2019s financing capacity, especially in the event of a downgrading of France and Austria, or even worse a widespread rating downgrading by S&P that could be announced in March1 if no steps forward are made on the front of EFSF II and of the new fiscal contract at the Summit scheduled at the end of this month.<\/p>\n

Rates below 1.0% in H1 2012<\/strong>
The ECB is likely to cut interest rates again, bringing them below the critical 1.0% threshold. In December, the ECB observed that there were still \u201csubstantial downside risks\u201d weighing on the macroeconomic scenario, despite the strong downgrading of growth estimates for 2012 (the November press release only mentioned \u201cdownside risks\u201d). The risks mentioned stem from tensions on the financial markets, and from possible repercussion on the real economy. Also, a further element of risk is a potentially weaker overall picture than forecast (a new element compared to the November release). By contrast, in December the ECB assessed the risks weighing on the consumer price trend as balanced. Therefore, our impression is that the ECB is still not entirely ruling out further cuts to interest rates to below 1.0%. During his latest press conference, Draghi said that the interest rate path also depends on fiscal policy developments.<\/p>\n

Therefore, the hope is that in the presence of strict austerity measures almost throughout the euro area, the ECB may opt for a slackening and cut rates below 1.0%. However, the first move in this direction is unlikely to come already in January, as at the December press conference Draghi indicated that the cut was not a unanimous decision, and that some members of the Council disagreed on its timing. The ECB may cut rates to 0.5% by May\/June, although it could also stop at 0.75%, considering that a further 0.25% cut would not necessarily make a difference. With the refi rat at 0.75% and an equivalent curt of the rate on deposits, on the other hand, the Eonia would in any case drop to zero: as a result of full allocation, the overnight rate remains compressed in the low end of the official rate corridor. <\/p>\n

Even if the ECB does not cut rates to less than 1.0%, we believe it is highly unlikely to set out on a monetary policy normalisation path before the end of 2013 or early 2014. In the best of cases, growth will rise back to levels just in line with the potential rate in 2013, as financial crises tend to have rather persistent effects on savings and investment trends. In such a context, the output gap is expected to stay markedly negative, and should help keep under control tensions on costs, wages, and prices. Indeed, the ECB is forecasting inflation at 1.6% in 2013.<\/p>\n

In conclusion: the measures adopted to support banks and the banking system are of unprecedented scope, and the ECB is therefore unlikely to take further steps in the immediate term. Nor do we expect dramatic changes in communication from Frankfurt on the SMP, barring truly catastrophic events. The ECB may cut rates to below the 1.0% threshold in the first half of 2012 to prevent the materialisation of the aforementioned \u201csubstantial downside risks\u201d on what is already a very fragile growth scenario. <\/p>\n

\n

(1) On 5 Dec. 2011 S&P placed under credit watch all the euro area countries. This implies a 50% chance of a downgrade within three months. The reasoning behind the move was essentially political, as the agency indicated that the euro area\u2019s financial stability was placed at risk by persisting \u201cdisagreements\u201d among the public authorities on how to solve the debt crisis.<\/p><\/div>\n

\n

Appendix
<\/strong> <\/p>\n

Analyst Certification<\/strong>
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.<\/p>\n

Important Disclosures<\/strong>
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\u2019s 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 (\u201cResearch Policy\u201d). The Research Policy is clearly explained in the relevant section of Banca IMI\u2019s 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<\/strong>
Trading Ideas are based on the market\u2019s expectations, investors\u2019 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<\/strong>
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\u2019s 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\u2019s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI\u2019s web site (www.bancaimi.com) or by contacting your sales representative.<\/p>\n

Source: BONDWorld – Intesa Sanpaolo \u2013 Research Department<\/p>\n","protected":false},"excerpt":{"rendered":"

The January ECB meeting will bring no important developments. The ECB will stay active in terms of the SMP, without changing its intervention strategy provided no dramatic event for the stability of the euro system takes place. Any announcement of non-conventional measures seems unlikely before the second thee-year fund auction due at the end of […]<\/p>\n","protected":false},"author":2,"featured_media":3414,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"telegram_tosend":false,"telegram_tosend_message":"","telegram_tosend_target":0,"footnotes":"","_wpscp_schedule_draft_date":"","_wpscp_schedule_republish_date":"","_wpscppro_advance_schedule":false,"_wpscppro_advance_schedule_date":"","_wpscppro_dont_share_socialmedia":false,"_wpscppro_custom_social_share_image":0,"_facebook_share_type":"","_twitter_share_type":"","_linkedin_share_type":"","_pinterest_share_type":"","_linkedin_share_type_page":"","_instagram_share_type":"","_medium_share_type":"","_threads_share_type":"","_google_business_share_type":"","_selected_social_profile":[],"_wpsp_enable_custom_social_template":false,"_wpsp_social_scheduling":{"enabled":false,"datetime":null,"platforms":[],"status":"template_only","dateOption":"today","timeOption":"now","customDays":"","customHours":"","customDate":"","customTime":"","schedulingType":"absolute"},"_wpsp_active_default_template":true},"categories":[37],"tags":[],"class_list":["post-862","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-marktanalyse"],"blocksy_meta":{"styles_descriptor":{"styles":{"desktop":"","tablet":"","mobile":""},"google_fonts":[],"version":6}},"_links":{"self":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/862","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/comments?post=862"}],"version-history":[{"count":0,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/posts\/862\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media\/3414"}],"wp:attachment":[{"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/media?parent=862"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/categories?post=862"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentworld.eu\/ch\/wp-json\/wp\/v2\/tags?post=862"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}