BofAML: ECB review: Offsetting December- and more

Redacción - Viernes, 11 de Marzo

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Euro Area Watch: ECB review: Offsetting December- and more •  ECB policy is back on a sounder footing with focus on QE, support to banks via generous TLTROs and stronger forward guidance.•  Front-end rates sold off as expected. We are neutral 10y, see flattening risk in 10s30s and are constructive the periphery. •  FX: We had recommended going short EUR into the ECB and buying the dip, but the EUR reaction still surprised us.

Offsetting December - and more

We thought that at the end of last year the ECB lost its way by appearing very shy on quantitative easing while making the deposit rate the main instrument of its policy, and the exchange rate the main transmission channel. Quite unsurprisingly this raised awareness on the cost of such policy for the banks, adding to the concerns over capital and funding which emerged over the last few months.  

We think that Draghi today skillfully brought the central bank to a much sounder footing, shifting focus back to quantitative easing (QE) and providing support and visibility to banks via a very generous TLTRO (Targeted Long Term Refinancing Operations) programme, as we expected, as well as strengthening forward guidance. 

Separately, we think that ultimately the announcement on non-bank Investment Grade (IG) corporate bonds may end up closer to the "sprinkling" we were expecting rather than a "big gun", but we have to wait for the details to make a full assessment. 

Finally, we regret that the ECB was not bolder on changing the technical limitations of QE, which may leave the market a bit skeptical about the capacity to extend the programme beyond March 2017, but we recognize the ECB has some time to deal with that. 

In general, we think that we have the "decent package" we were hoping for.

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