It has been touted that the ECB is ready to announce a programme of full blown quantitative easing which is likely to be €50bn of purchases every month for at least a year and which could be until the end of 2016. This meant that a programme of between €600bn to €1.1 trillion could be seen. Mario Draghi has alluded to a potential balance sheet expansion of around €1 trillion on a number of occasions, so these number are well within keeping with these communications.
In addition to the amount, we will surely get the detail of the composition (sovereign debt, corporate debt?), the length of its duration (1 year, 2 years, or how about a nice symmetry of “whatever it takes”), but also how the purchases are administered (whether centrally and directly through the ECB, or disseminated on a country by country basis via national central banks). However, there is much in the detail of the programme that could either encourage (resulting in the euro lower, sovereign yields down and Eurozone equities up), or disappoint on a basis of it is better to travel than arrive.
As we move into the announcement, in the past few months the markets have already gone some way towards pricing in action. The euro (ie. EUR/USD) has already dropped 17% since the ECB first announced in May the prospect of monetary easing. Furthermore, bond yields on Eurozone sovereign debt have also fallen an incredible amount in that time, with the German 10 year Bund falling from c. 1.45% to 0.55% today. Also the Eurozone indices have risen significantly through key resistance levels (such as the DAX whch is around an all time high), coming during a period where economics would suggest the gains are unjustified (due to low/no growth, persistent disinflation/turning into deflation, persistently high unemployment).
The big question is whether there is further downside in the euro/yields and upside in equities? I believe this will continue, but also I think that in the very near term the volatility of the announcement may mean that there could be a quick disappointment counter trend move.
The technical perspective suggests that a long term confluence of Fibonacci projection and retracement targets suggests a target of $1.1100/$1.1200 is perfectly possible. The theory suggests that there should be further downside for the euro and bond yields in the long run due to a significant and consistent presence in the market (i.e. ultimately the ECB). However the near term reaction may not be so easy to predict. As the news started to leak through of the ECB’s programme, after initial weakness, the euro spiked over 100 pips higher yesterday afternoon, only to retrace all the way back again. This all seems as though the market did not know what to make of the leak.
It has been interesting to observe the movement of core Eurozone sovereign debt in the past couple of days. Yields on German and French debt have spiked higher, with the German 10 year yield now at a 2015 highs this a case of “buy on rumour, sell on fact”? Maybe in the near term, however the bear long term trend remains firmly intact and I would still expect the Bund yield to continue lower in due course. I do not believe we have seen the low in the yield quite yet.
On the assumption that the ECB’s decision does not significantly disappoint the market, equity markets such as the DAX should be able to react positively as QE has historically been very positive for equity markets. The breakout on the DAX above 10,093 looks to be on decent footing and even if there is a near term dip, I expect this to be used as a buying opportunity. There is a good band of support at 9950/10090 that can be used.
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