Liquid Insight ECB: Solving the Sudoku

Alex Batchvarov, Ruben Segura-Cayuela, Sphia Salim and Athanasios Vamvakidis - Martes, 30 de Septiembre

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Assurance on ECB B/S expansion, maybe enough for markets We expect Mario Draghi to remove concerns over the potential balance sheet increase by arguing that TLTROs should be assessed together with the purchases of private assets, that these measures will help achieve the ECB's mandate, and if not, that the central bank stands ready to act further. He could become more explicit in suggesting that further disappointment in TLTROs would be compensated by larger asset purchases. There is certainly a large enough stock of assets for the ECB to try to remove some of the market skepticism regarding the balance sheet increase. Our skepticism is not about whether the expansion can be reached, but rather about whether the program can be designed such as to have a strong economic impact.  

Market expectations regarding ABS-CB purchases seem low, with the program announcement not meaningfully altering liquidity expectations. In fact, it appears Eonia forwards are now pricing in a lower liquidity environment (for the next few months) than before Draghi's Jackson Hole speech on 22 Aug (Chart of the Day). 

 

Please see full report for further details... 

Chart of the Day: Eonia-Refi rate spread, as implied by Eonia ECB date contracts - The market is now pricing a lower liquidity environment compared to pre-Jackson hole

Source: BofA Merrill Lynch Global Research

 

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