Intraday Market Thoughts

Looking at the ECB's Options

by Patrik Urban
Aug 2, 2012 12:17

BoE on hold; UK Construction PMI rose; Eurozone PPI declined; Swiss retail sales rose and PMI improved; Spanish auction. Market turns to ECB decision and press conference (see its options below), jobless claims and factory orders. A new set of Premium Insights will be released after the ECB press conference, focusing on NFP in teh aftermath of the ECB. Don't forget Ashraf's join-webinar tonight at 16:00 ET, 21:00 London time.

The FOMC inspired dollar rally faded and the greenback weakened against most majors during Asian and London sessions. EURUSD pushed back to 1.23 and commodity dollars were able to erase all post FOMC losses. European equities are gaining about 0.50%.

All eyes are on the ECB that will announce its decision at 7:45 am ET and the press conference that will follow 45 minutes later. Draghi induced optimism made expectations so high that the ECB now faces the risk that unless it announces a massive new policy measures, markets would be disappointed and the sentiment could drop along with the common currency. Lowering the minimum bid rate, LTRO3 or bond buying via SMP are some of the possibilities. Perhaps even granting the ESM a banking license is an option, despite the German opposition.

ECB Options

1. Restarting bond purchases SMP. CitiFX says 58% of its respondents expect this to happen but the market continues to see this unlikely to happen today.

2. EFSF buy Spanish and possibly Italian debt in the primary market, while ECB buys them in secondary market.

3. Broadening the range of collateral accepted by the ECB (equities and non-sovereign bonds).

4. Another 3-year LTRO, or issue a longer term such as 4 or 5 years.

5. Cut refinancing rate to 0.50% and deposit rate to below zero.

The BoE left rates unchanged at 0.50% and announced no new QE as expected. The MPC increased the asset purchase facility by GBP 50 bln on July 5th.

The construction output in the UK expanded in July as PMI rose to 50.9 from previous 48.2. However, new work received experienced the second fastest drop since 1/2010. GBP was not able to stage a recovery and EURGBP continues to push higher, currently trading just below the 0.79 handle.

In other news, Eurozone PPI declined 0.5% in June, the same pace of a decline as in previous month and Swiss retail sales rose 3.7% in June from previous 6.4% on annual basis. Swiss manufacturing PMI improved slightly to 48.6 in July from 48.1 in June.

Spain sold bonds totaling EUR 3.13 bln vs. EUR 3 bln target but had to pay up as all average yields rose. Spanish 10 year yield moved lower and trades around 6.64%.

Jobless claims at 8:30 am are seen higher at 375K from previous 353K and factory orders that are due at 10:00 am are expected to decline to 0.4% from 0.7%.



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