Not An Algo Is Stirring Ahead Of The ECB's Announcement

In today's abnormally quiet overnight session one could hear a pin, and certainly the USDJPY, drop: with everyone focusing on the ECB announcement in one hour, not a single algo is willing to make any big moves, or even start some momentum ignition, ahead of Draghi's announcement, which absent launching full scale QE, which it won't, will be a disappointment which means the EUR will ultimately move higher after a kneejerk lower as the market forces Super Mario to do even more next time. As Bloomberg adds, a cut in refi and deposit rates is fully priced in and latest price action suggests investors brace for     disappointment if ECB stops short of signaling asset purchases or other liquidity measures to combat deflation.

The overnight USDJPY trading team did its job and bought yen consistently during the Japanese session, as a result the Nikkei closed just barely green while the Topix ended its 10-Day rally. Also halting a rally was the 10 Year which in the past few days experienced the longest and sharpest consecutive days of selling in many months. However, with shorts having reloaded it is only a matter of time before the covering rally resumes.

European shares little changed with the construction and insurance sectors outperforming and financial services, real estate underperforming ahead of ECB and BOE interest rate decisions. The Italian and Spanish markets are the best-performing larger bourses, Swedish the worst. The euro is stronger against the dollar. Greek 10yr bond yields fall; Irish yields decline. Commodities decline, with WTI crude, Brent crude underperforming and natural gas outperforming.

Chinese equity markets recovered some of their manufacturing PMI-inspired losses overnight, with the Shanghai Composite (+0.8%) closing in the green, assisted some-what by services (50.7 vs. Prev. 51.4) and composite PMIs (50.2 vs. Prev. 49.5) from China, which continue to show modest economic growth in the country. Elsewhere, the Nikkei 225 managed to hold the 15,000 level in a directionless session, eventually finishing up just 0.08%.

U.S. jobless claims, continuing claims, Bloomberg consumer comfort, Challenger job cuts, household change in net worth due later.

  • S&P 500 futures little changed at 1925.2
  • Stoxx 600 little changed at 343.7
  • US 10Yr yield down 2bps to 2.58%
  • German 10Yr yield little changed at 1.44%
  • MSCI Asia Pacific up 0.1% to 143
  • Gold spot up 0.1% to $1244.7/oz


Chinese equity markets recovered some of their manufacturing PMI-inspired losses overnight, with the Shanghai Composite (+0.8%) closing in the green, assisted some-what by services (50.7 vs. Prev. 51.4) and composite PMIs (50.2 vs. Prev. 49.5) from China, which continue to show modest economic growth in the country. Elsewhere, the Nikkei 225 managed to hold the 15,000 level in a directionless session, eventually finishing up just 0.08%.


Euribor curve bull flattened this morning and EONIA fwds came under modest selling pressure, as market participants positioned for the upcoming ECB policy decision. At the same time, having gapped higher at the open, Bunds erased the opening gains as supply from Spain and France was successfully absorbed in thin trade ahead of the 1245BST/0645CDT announcement.


M&A news continue to swing single stocks, with FTSE-100 listed Smith & Nephew (SN/ LN) surging today after reports that Medtronic could be looking to acquire the company in order to benefit from the tax inversion process. Nonetheless, the FTSE-100 underperforms, weighed on by retail stocks Next (NXT LN) and Associated British Foods (ABF LN) – owners of bargain clothing range Primark – after retailer ASOS (ASC LN) issued a stark profit warning, wiping over USD 3bln from their market capitalisation. Ahead of the ECB rate decision, utilities are the best performing sector on the hopes that high-dividend paying stocks will surge on the back of any ECB asset-purchases or prospective liquidity measures.


EUR trades slightly firmer against most others, with the 1.36 handle providing modest support, however reading too much into the morning’s trend could prove unwise given the thin volumes ahead of the ECB rate decision later today. Elsewhere, NZD/USD surged higher following a note from Westpac on next week’s RBNZ rate decision, suggesting a move toward more hawkish tones from the central bank. AUD/USD initially tumbled after Australian trade balance unexpectedly printing a deficit before bouncing back following the Chinese HSBC Services PMI data.


In the metals complex, Platinum continues to underperform as it has done throughout the week, despite reports Platinum producers have asked for more time to consider the proposal before government brokered talks resume today, while gold has traded sideways throughout the session. While WTI and Brent crude futures both trade softer alongside precious metals

US President Obama has suspended all sanctions against Iranian oil imports for a period of six months as the Iranian government adhere with Western demands on their nuclear weapons programme. (PTI) Despite P5+1 group’s limits on Iranian oil sales, Iran have actually exceeded their sanctioned oil export levels routinely since the beginning of the year.

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Deutsche's Jim Reid completes the overnight recap

6 years and 10 months after the ECB embarked on their first major intervention in financial markets, today is likely to see the next major policy announcement and one that is unlikely to be their last. It's a reflection of just how stressed underlying economies still are that the three largest DM central banks (the Fed, ECB and the BoJ) are still engaging in unconventional policy to varying degrees over 7 years on from the first major issues with sub-prime. Even zero is not necessarily enough with the ECB likely to go into negative territory with deposit rates today.

Looking back, in August '07 the ECB injected €170bn into markets after money markets had seized up as banks basically refused to lend to each other. The point of today's intervention must surely be more directed at the underlying economy. However there will be many (including us) that would say that the ECB's success will likely depend on how much they can push the Euro lower. Will today be enough? Probably not on its own but for us one the most important take-away from today's meeting is how much Draghi leaves the door open for more action (in particular QE) in the months ahead. So all eyes  on the press conference after the announcement.

For the record, DB’s Mark Wall & Gilles Moec expect a “package” of policy easing today (for full report refer to weighty expectations dated 31 May). The easier options for the ECB are extending full allotment, cutting the refi rate and ending SMP sterilization. Given Draghi & Co’s recent tone, Wall & Moec  think the Council will go further and in addition implement a negative deposit rate and a targeted LTRO. The policy they expect the ECB to most pin its hopes on to impress the markets is the targeted LTRO. They expect a modest, SME loanoriented LTRO. In terms of the wider market, Bloomberg median consensus is for the refi rate to be cut by 15bp (to 0.1%) and the deposit facility rate to be cut 10bp (to -0.1%). CNBC surveyed 30 market participants, including economists, strategists and fund managers, and found that 65% of them expect the ECB to take at least one of three substantial actions: lowering the refinance rate, cutting the deposit rate or announcing a long-term refinance operation or LTRO. About half of the respondents expect two of those three actions to be announced and a quarter think all three will happen. Aside from these policy options, there have also been reports of other policy tools such as a BOE-like Funding for Lending Scheme and an easing of asset backed securitisation rules.

Indeed given the number of policy options at hand, our fixed income strategist Abhishek Singhania points out that it’s very hard to judge what constitutes over/under delivery from the ECB. Nevertheless Abhishek notes that a 10bp cut to each of the main policy rates appears to be the market consensus and is fully priced-in at this point. A 15bp cut would be the ECB over-delivering while anything less than 10bp would be a case of underdelivery. In terms of forward guidance, the ECB could emphasise that there is no floor to the deposit facility rate. The other area of focus is in regards to LTROs where overdelivery could be defined as the central bank offering funding at longer maturities (3yr+), at a capped rate with very little conditionality in terms of either size or collateral use.

Turning to Asian markets, a relatively subdued overnight session ahead of today’s risk events with some profit taking in Japanese equities (-0.3%), and similar sized losses on the KOSPI (-0.5%) and ASX200 (-0.3%). The Chinese HSBC services PMI printed at a four month low of 50.7 (prev 51.4) suggesting that growth momentum remains fairly patchy despite the better official manufacturing PMI released on the weekend. While on the topic of China, a quick update on the story we mentioned in yesterday’s EMR about the investigation regarding missing commodity inventory at the port of Qingdao.

South Africa-based Standard Bank said it was "working with local authorities" to investigate potential irregularities at China's third-largest port.  Meanwhile, global commodities trader Louis Dreyfus also said that it was assessing the impact of the investigation on one of its units (Reuters). As background, authorities are investigating whether commodity inventory at the port had been pledged multiple times to different banks in order to raise financing. It’s uncertain whether this could result in banks being more cautious in giving trade finance to merchants or if it may result in diminished demand for commodity imports. London copper has fallen 2.4% in the past two days. In Australia, the AUD has seen some volatility but is still trading around 0.1% higher following a miss on the April trade report (-$122n deficit vs surplus of $510m expected).

Coming back to Wednesday, the S&P500 (+0.19%) managed to notch up another record high but they started on a downbeat tone after the ADP employment miss. ADP employment for May rose +179k (vs +210k expected) after the prior month was revised down -5k to +215k. In the details, small and medium sized business hiring increased by 143k compared to 158k previously, while large businesses added 37k jobs in the month, versus 56k previously. DB have kept their +200k forecast for payrolls and it seems that Street forecasts for payrolls have barely budged either post ADP. Treasury yields also dipped to a low of 2.56% following the data, but the upward trend resumed shortly afterwards, helped along by the better than expected US nonmanufacturing ISM. The non-manufacturing ISM for May printed at 56.3 (vs 55.5 consensus). DB’s economists noted that various subcomponents of the index performed well including business activity (62.1 vs. 60.9) which rose to the highest level since February 2011 (63.3). Similarly, new orders (60.5 vs. 58.2) were the highest since January 2011 (61.2), while the employment sub-component also rose (52.4 vs. 51.3). The latter probably partly explains why we haven’t seen more material revisions to Friday’s payrolls estimates. The US trade balance saw the deficit widen in April to a two-year high of USD 47.2bn (vs - USD40.8bn expected) which might weigh on Q2 GDP estimates. The Fed Beige book highlighted that economic activity expanded in all 12 districts at a “moderate” pace (7 districts) and “modest” pace (5 districts). With inflation, some districts noted high or rising prices for commodities, construction materials, energy and precious metals. However, in aggregate, price pressures remained “contained”.

Looking at the performance of US retail (+0.45%), basic materials (+0.32%) and financial (+0.31%) stocks, there was a noticeable growth tone to the price action yesterday. The positive sentiment was also helped along by the ongoing M&A theme which continues to make headlines. Indeed, this morningBloomberg is reporting that Sprint Corp is nearing an agreement for the acquisition of T-Mobile Inc at a price which would value that latter’s equity at about $31bn. Overall M&A volumes are still very robust, running at +75% y/y but we would highlight that other indicators of excessiveness are still reasonable by historical standards. For example, deal price premiums for Q2 are around 20% at the moment, versus an average over the last four quarters of 24% (Bloomberg). The WSJ also writes today that withdrawn M&A bids have reached $300bn so far in 2014, which represents a third of all completed transactions. The biggest withdrawn bid this year was Pfizer’s $122bn failed takeover of AstraZeneca.

Turning to the day ahead, France publishes its latest unemployment report followed by German factory orders (0700 LDN). Euroarea retail sales come at 10am. The Bank of England policy announcement is at 12noon. The ECB announces its policy rates at 1245 LDN and as usual Draghi’s press conference follows 45 minutes afterwards. It’s also worth watching out for the Governing Council’s latest macroeconomic forecasts should come out today as well. With all the events in Europe, thankfully it’s a relatively quiet day on the US calendar with weekly jobless claims and the Fed’s Kocherlakota speaking in Boston towards the market close. Also in the UK today, voters go to the polls in a by-election in the town of Newark where it will be interesting to see  whether UKIP's momentum continues or fades post their recent European election gains.

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