ECB: is it all over and done with?
François Raynaud is fund manager Sovereign Debt at Edmond de Rothschild Asset Management.
Investor expectations are riding high for the ECB meeting on 3 December. Markets are expecting the bank to take sweeping action, in tune with recent comments from its chairman, Mario Draghi.
The ECB might choose to rush through some headline announcements, but subsequently they will have less room to manoeuvre due to expectations of higher inflation next year mainly because of a commodity base effect. After all, the bank’s mandate is essentially to support prices.
The ECB could cut its deposit rate by at least 10bp while extending both the size and duration of its asset purchase programme.
Local authorities might become eligible issuers. Any moves towards purchasing longer maturities (over 30 years), ending country repartition keys, changing bond duration targets or including corporate debt would surprise investors and boost prices in these market segments. They would also lead to yield curve flattening and tighter spreads on corporate debt and peripheral yields compared to core countries.
If the ECB manages not to disappoint investors, equity and bond market should logically applaud Thursday’s decision while the euro will continue to depreciate.
However, the ECB wants to act as a watch dog and so could choose not to roll out all its available tools ahead of the Fed’s decision on 16 December. The bank knows that it will have to keep any contagion from higher US rates to a minimum. In the meantime, investors will have to deal with high volatility.