Is The ECB Pricing Investors Out Of The Primary Market?

Christmas has come early for Europe, with Mario Draghi’s goodbye present to the market of further quantitative easing (“QE”). The ECB has kicked off its latest round of asset purchases. While this will undoubtedly be supportive for European credit, I feel much of the impact is already priced in to the secondary market. With a large book to fill, a significant part of the ECB’s ammunition is likely to be deployed in the primary market.

The ECB buying will clearly be supportive for corporate bonds, but just how material is the buying going to be? Wolfgang Bauer recently wrote a blog (here) looking at the impact of this latest round of QE. This time, the ECB is buying from a much lower base.

To assess what impact they might have, I think it’s useful to look at the volume of supply we’ve had, and probable ECB participation going forward. Looking at the breakdown by investor type for the recent Daimler new issue (A-rated by Fitch) from 30th Nov as an example, I estimate that around €535m of the €4bn deal was bought by the ECB – a rough exercise admittedly. This is a significant amount of the expected purchases per month (around 10% if we assume higher end of €5bn of purchases per month). And this is 13% of the €4bn deal too.

Shell also issued €3bn on 4th November which priced in line with the existing secondary curve. I estimate ECB participation was around 25% of this deal – a further €750m. If the ECB continues to buy such a significant proportion of issuance, we will likely see investors priced out of new issuance as deals come with zero new issuance premium. This primary participation will be very important dynamic to monitor, and one which investors will be watching for a number of prolific issuers – with VW another likely contender.

We have had a bumper year of corporate supply, largely due to low financing costs in Europe. A large proportion of this has been ‘reverse yankees’ – US issuers taking advantage of low Euro financing costs. I have excluded these from the analysis as the ECB can only purchase European issues. Still, YTD 2019 issuance has been €476bn (up 27% from last year). The chart below shows the total senior corporate supply, ex reverse yankees, for last three months across all credit ratings.


The practice and velocity of ECB buying will be a supportive factor for spreads in November but, in my opinion, this will be reasonably small in absolute terms. The ECB and its buying boots have undoubtedly boosted market sentiment but, after the initial Dealer inventories of high quality eligible paper have been hoovered up by the central bank, the greater extent of the move will be in its effect on wider BBB eligible names and non-eligible paper – so-called beta compression.

I expect the ECB will come out the traps at a good pace. Expectations for supply in November remain healthy, albeit reducing, so the run-rate is likely to be ahead of the long-term rate in the early phase of the programme. Today will be an interesting date as we will have a summary of ECB purchases from last week – so we can see for ourselves how busy the central banks have been!

ECB purchases are expected to increase in 2020 as redemptions from QE round one roll off. This technical tailwind will therefore increase in strength and undoubtedly continue to be supportive for spreads. However the effect of CSPP crowding out investors, particularly in the primary market, seems far more diminished in the face of declining European growth. Investors are cautious on moving down the capital structure with valuations looking ever more stretched versus fundamentals.

Read the entire article

Exposing The ECB's Beggar-Thy-Trump Strategy

The European Central Bank's decision to cut interest rates still further and launch another round of quantitative easing raises serious concerns about its internal decision-making process. The ECB is pursuing an exchange-rate policy in all but name, thus putting Europe on a collision course with the Trump administration. 

On September 12, the European Central Bank decided to launch yet another asset-purchase program, with plans to buy €20 billion ($22 billion) in new securities per month for an indefinite period of time, using the same structure as it has in the past. The decision was not made unanimously: the German, French, Dutch, Austrian, and Estonian members of the ECB council have all voiced fierce opposition to further quantitative easing (QE).

ECB President Mario Draghi claims that the majority in favor of further loosening was so large that it was unnecessary even to count the votes. Never mind that the countries opposing the decision hold 56% of the ECB’s paid-in equity capital and account for 60% of eurozone output. Counting their compatriots on the ECB Governing Council, however, they have only seven out of 25 potential votes (subject to a rotating limitation). Draghi did have a majority, then, but it represented a very clear minority of the ECB’s liable capital. This raises considerable concerns about the Governing Council’s decision-making process.

Such concerns are all the more justified considering that US President Donald Trump has been complaining loudly about the implied exchange-rate policy stemming from ECB asset purchases. He has a point. Draghi, of course, insists that the ECB does not “target” the exchange rate. While that may be true, it is beside the point. By purchasing long-term securities, eurozone central banks will once again trigger a currency devaluation. Indeed, it is precisely this effect that likely plays the dominant role in stimulating economic activity.icy in all but name, thus putting Europe on a collision course with the Trump administration.

Read the entire article

Full ECB Preview: Draghi Parting Gift - A Bazooka Or A Water Pistol?

Tomorrow, at 13:45am CET (7:45am ET) the will unveil its Draghi "Swan Song" Monetary Policy Decision, with a press conference Due At 13:30BST, (08:30ET)

• Surveyed analysts look for the ECB to cut the deposit rate by 10bps with the Main Refi and Marginal Lending rates seen unchanged
• Markets currently price in around a 40% chance of a deeper cut to the deposit rate of 20bps
• Focus will be on any potential complimentary easing measures alongside expected rate reductions
• ECB staff economic projections will likely reflect the downbeat prospects for the Eurozone economy

INTRODUCTION

Will outgoing ECB president Mario Draghi's "swan song" decision - the one in which he is widely expected to cut rates deeper into negative territory and resume sovereign and/or corporate QE - be a bazooka or a waster pistol? That's the question.

Markets currently fully price in a 10bps reduction in the deposit rate to -0.5% with just over a 40% chance of a deeper cut of 20bps.

Read the entire article

EU Bank Bosses Warn Of "Grave Consequences" If ECB Keeps Cutting Rates

The ECB's imposition of negative interest rates have created an "absurd situation" in which banks don't want to hold deposits, rages UBS CEO Sergio Ermotti, arguing that this policy is hurting social systems and savings rates.

Ermotti is not alone. As European bank bosses cast their eyes at their share prices, they are fighting back, some have said - biting the hand that feeds, in their attack on ECB policies, warning of severe consequences to asset prices and the broader economy.

As Bloomberg reports, Deutsche Bank CEO Christian Sewing warned that more monetary easing by the ECB, as widely expected next week, will have “grave side effects” for a region that has already lived with negative interest rates for half a decade.

“In the long run, negative rates ruin the financial system,” Sewing said at the event, organized by the Handelsblatt newspaper.

Another cut “may make refinancing cheaper for states, but has grave side effects.”

While incoming ECB head Christine Lagarde has claimed that the benefits of deeply negative rates outweigh the costs (stating just this week that “a highly accommodative policy is warranted for a prolonged period of time;" few economists believe another cut at this level would actually help the economy. According to Sewing, all it would achieve is to further divide society by lifting asset prices while punishing Europe’s savers who are already paying 160 billion euros ($176 billion) a year because of negative interest rates.

Read the entire article

ECB Preview: The Beginning Of The End Of QE?

With the surprisingly hawkish Fed out of the way, there's only the ECB left to round out this week's relentless barrage of news and events (the BOJ will be a big snooze). So, courtesy of RanSquawk, here is what to expect from Mario Draghi when he takes the microphone in Latvia (an odd place, considering the country's own central banker Ilmars Rimsevics has been barred over corruption charges) tomorrow at 8:30am when he may unveil the end of Europe's QE.

• Unanimous expectations for the ECB to leave its three key rates unchanged
• Will the ECB unveil its blueprint for winding down the PSPP or will they again ‘kick the can down the road’ to July?
• Questions likely to be raised on the Bank’s view surrounding the latest developments in Italian politics
• Macro projections likely to see oil prices curtail 2018 growth expectations whilst lifting inflation prospects

PREVIOUS MEETING: The Bank left their opening statement unchanged in what was a meeting ultimately void of fireworks with Draghi intent on fending off most questions from journalists by stating that the Bank did not discuss FX volatility, their June roadmap, monetary policy ‘per se’ or rising yields. On the economic front, Draghi stated that inflation remain subdued and is yet to show signs of an upward trend, whilst incoming data since the March meeting shows a moderation of growth.

ECB MINUTES: Markets were relatively unreactive to the latest ECB minutes which made little mention of discussions on the future path of monetary policy and instead focused on current economic performance. The account highlighted the views that the more pronounced weakening of demand cannot be ruled out, suggestions that the ECB was close to a sustained adjustment of inflation but most disagreed and that uncertainty over the outlook had increased.

Read the entire article

"No One's Ready For The ECB" - The Eurozone's Coming Debt Crisis

The European Central bank has signaled the end of its asset purchase program and a possible rate hike before 2019. After more than 2 trillion euro of purchases and zero interest rate policy, it is overdue.

The massive quantitative easing program has generated very significant imbalances and the risks outweigh the questionable benefits.

The balance sheet of the ECB is now more than 40% of the Eurozone GDP.

The governments of the Eurozone, however, have not prepared themselves at all for the end of stimuli.

Rather the contrary.

The Eurozone states often claim that deficits have been reduced and risks contained. However, closer scrutiny shows that the bulk of deficit reductions came from lower cost of debt. Eurozone government spending has barely fallen, despite lower unemployment and rising tax revenues. Structural deficits remain stubborn, and in some cases, unchanged from 2013 levels.

Read the entire article

A Strong Euro Is A Headache For The ECB

In recent weeks, the euro has been at its highest level, relative to the US dollar, that we've seen in the last three years. This is a movement that surprises when the European Central Bank is carrying out the most aggressive monetary expansion in the world after the Bank of Japan.

A strong euro is not a problem for any European citizen. European households keep a large part of their financial wealth in deposits. Additionally, a strong euro curbs inflation in imported products, mainly energy and food, generating a significant wealth effect.

If we look at the commodity index between January 6, 2017 and January 12, 2018, we can see that it has fallen by more than 12% in euros, while it is slightly up in US dollars. For the average European citizen, a stable or strong euro is a blessing, and one of the essential factors for the recovery of household disposable income.

A strong euro has not been a problem either for exports. Spain, for example, has increased by 53% the weight of exports in GDP in the last five years and Eurozone exports in 2017 marked a record, growing more than the average of global trade and with a record trade surplus, which is one of the decisive factors explaining the euro strength.

Read the entire article

ECB May Have Only €220 Billion In QE Left If The Hawks Get Their Way

After seemingly sending out trial balloons (via Bloomberg and Reuters simultaneously) on tapering last Thursday, which had almost zero impact (see “ECB Reportedly Considering Slashing QE in Half in January, EURUSD Shrugs), Draghi’s minions have been busy again.

“Central bank officials familiar with the matter” told Bloomberg that some - presumably quite hawkish - ECB policy makers “see room for little more than 200 billion euros ($235 billion) of purchases under the institution’s bond-buying program next year.”  With said “officials” (who asked not to be named because the talks are not private anymore) seeing a limit to bond buying of 2.5 trillion euros under the current rules and purchases expected to reach 2.28 trillion by the end of 2017, we can do the calculation.

According to last week’s trial balloons, the ECB was looking at reducing its purchases from €60 billion euros to about €30 billion for at least nine months.

As we also explained in “How Will The ECB's QE Tapering Impact The Market? Here Are The Possible Scenarios”, the market neutral level of APP extension estimated by Citi appears to be around 250 billion Euros, or roughly €50 billion more than "some" ECB policymakers will permit. The three broadly market neutral scenarios laid out in Citi’s model were €20bn x 12mth, €30bn x 9mth and €40bn x 6mth as shown below.

Read the entire article

95% Of Europeans Reject EU Efforts To "De-Cash" Their Lives

But the IMF has suggestions on how to win the War on Cash...

In January 2017 the European Commission announced it was exploring the option of imposing upper limits on cash payments, with a view to implementing cross-regional measures as soon as 2018. To give the proposal a veneer of respectability and accountability the Commission launched a public consultation on the issue. Now, the answers are in, but they are not what the Commission was expecting.

A staggering 95% of the respondents said they were opposed to a cash ceiling at EU level. Even more emphatic was the answer to the following question:

“How would the introduction of restrictions on payments in cash at EU level benefit you, or your business or your organisation (multiple replies are possible)?”

In the curious absence of an explicit “not at all” option, 99.18% chose to respond with “no answer.” In other words, less than 1% of the more than 30,000 people consulted could think of a single benefit of the EU unleashing cross-regional cash limits.

Read the entire article

Core Eurozone Inflation Surges To 4 Year High As CPI Nears ECB Target

Mario Draghi's job just became a little more difficult, because one day after the head of the ECB surprised markets with a more dovish statement than expected stressing risks for European inflation, on Friday morning Eurostat reported that Euro zone inflation rose by more than expected to the European Central Bank's target and core inflation increased to its highest level in four years.

Inflation in the 19 countries sharing the euro was 1.9 percent year-on-year, Eurostat estimated, up from 1.5 percent in March and just short of the four-year high of 2.0 percent recorded in February. The print was also above the 1.8% consensus estimate, even though German inflation data released on Thursday which also came in hotter than expected had prepared markets for a potential stronger figure for the bloc.

The April print (released before the month is even over) was also just shy of the ECB's medium-term target for inflation of 2 percent.

Overall inflation was higher primarily because of a 7.5% rise in energy prices and of 2.2% for unprocessed food. Prices for food, alcohol and tobacco went up by 1.5% in April, slightly lower than the 1.8% figure for March. In the services sector, the largest in the euro zone economy, prices rose by 1.8 percent in April, compared with 1.0 percent in March.

Core inflation, excluding volatile prices of energy and unprocessed food and which the European Central Bank monitors even more closely, jumped to 1.2% year-on-year in April from 0.8% in March, above market expectations of 1.0 percent. The core level was at its highest level since September 2013.

Read the entire article

EURUSD, Bond Yields Tumble After ECB Walks Back Policy Shift: "Wary Of Upsetting Investors"

The Euro and European bond yields tumbled this morning after Reuters reported 'sources' saying the ECB is wary of fresh policy change (i.e. the expected quasi-tightening) before the June meeting, because it is worried about bond yield spikes.

Via Reuters:

European Central Bank policymakers are wary of making any new change to their policy message in April after small tweaks this month upset investors and raised the specter of a surge in borrowing costs for the bloc's indebted periphery.

One ECB source said the bank has been overinterpreted by markets at its March 9 meeting.

Taken aback when markets started to price in an interest rate hike early next year, policymakers are keen to reassure investors that their easy-money policy is far from ending, suggesting reluctance change message before June, six sources in and close to the Governing Council indicated.

While the current level of bond yields remains acceptable, a further increase would be problematic, particularly in places like Italy, Spain and Portugal, where debt payments are a major cost item and rising yields would curb spending and thwart growth.

With the euro zone economy on its best run in almost a decade and conservative policymakers# keen to start winding down stimulus, the ECB gave a small nod to improvement with a tweak of its guidance in early March, axing a reference to being ready to act with all available instruments.

Read the entire article

EU Taxpayers Brace As Deepening Banking Crisis Means Euro-TARP Looms

If the ECB scales back stimulus, banks face even greater risk of collapse. But now there’s a new solution

Events are moving so fast in Europe these days, it’s almost impossible to keep up. While much of the attention is being hogged by political developments, including the election in the Netherlands, Reuters published a report warning that the European banking sector may face even higher bad loan risks if the ECB begins to scale back its monetary stimulus programs, something it has already begun, albeit extremely tentatively.

The total stock of non-performing loans (NPL) in the EU is estimated at over €1 trillion, or 5.4% of total loans, a ratio three times higher than in other major regions of the world.

On a country-by-country basis, things look even scarier. Currently 10 (out of 28) EU countries have an NPL ratio above 10% (orders of magnitude higher than what is generally considered safe). And among Eurozone countries, where the ECB’s monetary policies have direct impact, there are these NPL stalwarts:

Ireland: 15.8%
Italy: 16.6%
Portugal: 19.2%
Slovenia: 19.7%
Greece: 46.6%
Cyprus: 49%

Read the entire article

Crude Plunges Below $49, Dragging Markets Lower; All Eyes On Draghi

While traders will be focused on the ECB, and Mario Draghi, early Thursday, it is unlikely that the European central bank will announce anything overly dramatic (see preview in a subsequent post), and instead the attention will be on the ECB's inflation forecast for hints of when the ECB may accelerate tapering after its December 2016 QE cut, as Draghi scrambles to catch up with commodity inflation, if not so much core CPI, which has remained subdued.

However, a more pressing development as US traders get to their desks today, will be the ongoing collapse in WTI, which after crashing 5.5% yesterday, has plunged as much as 3% this morning, sliding not only below $50 for the first time since December 1, but also dropped under $49, and was trading $48.90 at last check, as a near record number of net long spec positions suddenly rush to unwind their exposure.

After resisting oil's gravitational drag earlier, S&P futures snapped, and were trading lower by 0.2% at 2,357. Should the drop persist, this would be the longest losing streak for the index in five weeks.

Elsewhere, European and Asian stocks fell, ahead of the European Central Bank’s meeting while the Bloomberg Dollar Spot Index headed for its best back-to-back weeks since December, rising after yesterday's blockbuster ADP report and expectations that tomorrow's NFP will not derail the Fed's March reta hike, the euro and yen dropped. Speaking of the ADP report, RBC chief economist Tom Porcellisaid the report was so strong it meant the payrolls report on Friday would have to be unbelievably dire to deter the Fed from hiking next week.

"There is almost no number that would stop them," said Porcelli. "It would take an extreme event for the Fed to take a pass at this point."

Indeed, he noted the ADP surprise meant there was a real chance payrolls could beat expectations, perhaps by a lot. "On the face of it, ADP is consistent with private payrolls of about 340,000," he said. The current median forecast is for a rise of 190,000.

Read the entire article

Italy's Monte Paschi Told To "Prepare For State Bailout"

On Sunday night, when we commented on the results of the Italian referendum, we said that while the Italian political limbo may or may not be an issue in the near term, a bigger problem for Italy will be the fate of Monte Paschi, whose 3rd bailout was likely doomed to failure after the failed referendum, which could unleash contagion upon the Italian banking sector at a very precarious time for Italy and Europe.

Overnight, we got confirmation of that from not one but two sources, with Italian Il Sole 24 reporting that the Italian treasury is considering “precautionary” direct state intervention to rescue the bank, a plan that has already been sketched out by Rome and Brussels. The lender’s executives are meeting with European Central Bank officials today and may ask for a delay to a non-performing loan sale that’s part of the bank’s capital increase plan, the newspaper said.

In an interview with Bloomberg TV, Marcello Messori, economics professor at Luiss University said that “the probability of finding a natural market solution is very very low currently, due to the fact that instability implies that international investors have a lot of difficulties to decide in the short term for a very important recapitalization" and added that the ECB may give more time “if there is a solution on the horizon.”

There may not be a solution, as both the company's stock price, which fell for the fourth consecutive day, down 2.5% and plunging 85% YTD, and as the FT adds. According to the Nikkei's subsidiary, "bankers are running out of private-sector solutions for Monte dei Paschi di Siena and have told the Italian lender to prepare for a state bailout this weekend after prime minister Matteo Renzi was felled by a referendum defeat.

Read the entire article

Is ECB 'Omnipotence' "Too Powerful For Any Democracy To Abide"?

The reputation of central banks has always had its ups and downs. For years, central banks’ prestige has been almost unprecedentedly high. But a correction now seems inevitable, with central-bank independence becoming a key casualty.

Central banks’ reputation reached a peak before and at the turn of the century, thanks to the so-called Great Moderation. Low and stable inflation, sustained growth, and high employment led many to view central banks as a kind of master of the universe, able – and expected – to manage the economy for the benefit of all. The depiction of US Federal Reserve Chair Alan Greenspan as “Maestro” exemplified this perception.

The 2008 global financial crisis initially bolstered central banks’ reputation further. With resolute action, monetary authorities made a major contribution to preventing a repeat of the Great Depression. They were, yet again, lauded as saviors of the world economy.

But central banks’ successes fueled excessively high expectations, which encouraged most policymakers to leave their monetary counterparts largely responsible for macroeconomic management. Such “expectational” and, in turn, “operational” overburdening has exposed monetary policy’s true limitations.

In other words, central banks’ good reputation now seems to be backfiring. And “personality overburdening” – when trust in the success of monetary policy is concentrated on the person at the helm of the institution – means that individual leaders’ reputations are likely to suffer as well.

Read the entire article

ECB's First Chief Economist Warns: The EU Is A "House Of Cards"

None of the following about the EU will come as a surprise to most of you, but the language used by Otmar Issing is nevertheless pretty remarkable.

The Telegraph reports:

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned.

“One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist and a towering figure in the construction of the single currency.

Prof Issing said the euro has been betrayed by politics, lamenting that the experiment went wrong from the beginning and has since degenerated into a fiscal free-for-all that once again masks the festering pathologies.

“Realistically, it will be a case of muddling through, struggling from one crisis to the next. It is difficult to forecast how long this will continue for, but it cannot go on endlessly,” he told the journal Central Banking in a remarkable deconstruction of the project.

The regime is almost certain to be tested again in the next global downturn, this time starting with higher levels of debt and unemployment, and greater political fatigue.

Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said. 

The ECB has “crossed the Rubicon” and is now in an untenable position, trying to reconcile conflicting roles as banking regulator, Troika enforcer in rescue missions and agent of monetary policy. Its own financial integrity is increasingly in jeopardy.

Read the entire article

ECB Allowed Deutsche Bank To Cheat In Latest Stress Test, FT Reports

In the latest scandal to emerge involving Deutsche Bank, earlier today the FT reported that German's largest lender was allowed to cheat, pardon was given "special treatment" by the ECB in the July stress tests.  As part of the July stress tests results, which "promised to restore faith in Europe’s banks by assessing all of their finances in the same way" Deutsche Bank’s result was boosted by a "special concession" agreed to by Mario Draghi: DB's results included the $4 billion in proceeds from selling its stake in Chinese lender Hua Xia even though the deal had not been done by the end of 2015, the official cut-off point for transactions to be included.

While the Hua Xia sale was agreed in December 2015, it has still not been completed and now faces a delay after missing a regulatory deadline last month, though the bank is still confident of completion this year.

As the FT notes, the Hua Xia treatment was disclosed in a footnote to Deutsche’s stress test results, and adds that "none of the other 50 banks in the stress tests had similar footnotes, even though several also had deals agreed but not completed at the end of 2015."

As disclosed in the central bank's summer stress test, Deutsche’s common equity tier one capital fell to 7.8% after it was "subjected to the stress tests’ imagined doomsday scenario of fines, low interest rates and low economic growth." However, without the Hua Xia boost, the ratio would have been 7.4%, a level comfortably above regulatory minimums. Why the speal treatment? Because the higher published result helped reassure investors who were growing increasingly nervy about the bank’s capital adequacy.

Read the entire article

ECB Secretly Hands Cash to Select Corporations

In June, the ECB began buying the bonds of some of the most powerful companies in Europe as well as the European subsidiaries of foreign multinationals. This pushed the average yield on euro investment-grade corporate debt to 0.65%. Large quantities of highly rated corporate debt with shorter maturities are trading at negative yields, where brainwashed investors engage in the absurdity of paying for the privilege of lending money to corporations. By August 12, the ECB had handed out over €16 billion in freshly printed money in exchange for corporate bonds.

Throughout, the public was given to understand that the ECB was buying already-issued bonds trading in secondary markets. But the public has been fooled.

Now it has been revealed by The Wall Street Journal that the ECB has also secretly been buying bonds directly from companies, thus handing them directly its freshly printed money.

It has been doing so via “private placements.” These debt sales are not open to the broader market. There’s no need for a prospectus. Only a small number of institutional investors participate. It allows companies to raise cash quickly, without jumping through the normal hoops. Private placements are not unusual. What’s new is that the ECB used them to buy bonds.

There have been two of these secretive private placements. And Morgan Stanley arranged them. The Wall Street Journal determined this by analyzing data from Dealogic and national central banks.

The two companies involved were the Spanish energy giants Repsol and Iberdrola. The Bank of Spain, now no more than a local branch of the ECB, was among the select buyers of a €500 million bond issued by Repsol. It is also the owner of part of a €200 million bond issued by Iberdrola. Among the advantages of issuing debt in a private placement is that it allows companies to raise cash quickly. According to Apostolos Gkoutzinis, head of European capital markets at law firm Shearman & Sterling, cited by The Wall Street Journal: because there is no prospectus or the other formalities required in a normal bond offering, “there won’t be any transparency, there won’t be a press release. It’s all done discreetly.”

Read the entire article