The risk rally has been wavering slightly this morning. However, the European Central Bank has given the bulls another reason to feel good about themselves in its latest announcement of monetary policy. No changes to rates (as expected) but it cam forward with a larger than expected increase to its Pandemic Emergency Purchase Programme (PEPP). We look a the impact on the Euro, DAX and yield spreads.
There are three strands to the ECB’s statement today:
- Laying out an increase to the PEPP
- Reiterating its existing Asset Purchase Programme
- and the decision on interest rates
Two out of the three have come as expected.
The PEPP programme has been increased by an extra €600bn to a total of €1350bn. Given that the original €750bn fund for purchases would be running out by late summer 2020, this was widely expected to have been increased. The consensus was around €500bn, so the announcement is more than the market had expected. It again reflects a determination on the Governing Council that it will do “whatever it takes” to help. The market has reacted positively.
Increasing the size of the fund by an extra €600bn will enable the purchases to go up to June 2021. Howwver, it also give information that the principal reinvestments will continue at least until the end of 2022. This is a statement of intent from the ECB that it is very much here to act as a backstop during the recovery from the pandemic.
The ECB policy statement also has also given information of the Asset Purchase Programme. There were no surprises here though. No change to the current policy or from the statement of last meeting.
Furthermore, interest rates were expected to be held at current levels and they have been. The main refi rate of zero and the deposit rate of -0.50% was all expected.
Market Impact
A larger than expected increase in the PEPP is Euro supportive as it continues to significantly support the Eurozone, helps to reduce yield spreads and reduce the risk premia for the euro. It is also bullish for equities.
- Yield spreads have tightened – the Spanish 10 year yield has dropped sharply and the spread over German yields (see below) has narrowed by c. -10 basis points.
- EUR/USD – has jumped by over +50 pips in response back around the highs of yesterday. We expect that this will play a role going forward for support of the euro and help pull EUR/USD higher in due course.
- DAX – has jumped by around +80 ticks (although it is off its initial highs which were around +150 tick up in response.
We now wait to see the volatility from the press conference and the staff economic projections.
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