Against this backdrop, Citywire Selector canvassed top managers on what to expect from today’s meeting.
According to Aberdeen AM’s Ben Pakenham the market is pricing in a high probability of a six-month purchase extension in the wake of the Italian referendum vote.
‘The ‘No’ vote was no particular surprise, what’s of interest is what is going on with Monte dei Paschi di Siena (MPS). Any kind of hint that QE will be tapered in Europe would be assumed very negatively in that context.’
‘At the moment MPS is trying to get a capital injection and debt for equity swap, it looks as though they are still in some pretty serious negotiations regarding that, I’m sure whoever is negotiating with the bank will be keeping an eye on what the ECB is doing.’
Pakenham said if the ECB extends QE then concerns over tapering gets put back on the table.
‘If they extend by six months it goes from a March end to a December end, it’s likely by March the conversation will turn to tapering again and that’s worth bearing in mind.’
Natixis Asset Management’s head of credit, Philippe Berthelot, echoed the view that Italians will be the keenest observer of what Draghi & co. announce later today.
‘The only thing unexpected about the Italian referendum outcome was the margin, which has ended up sitting around 60/40 with high levels of participation from the Italian people.’
‘The emphasis is now clearly on what the ECB does, as that might serve as a backstop to any significantly adverse market reaction if it expands its policy as expected, the banks remain more critical in that context’, he added.
Meanwhile, Old Mutual Global Investors' head of global bonds, Mark Nash, said there is unlikely to be any new developments today despite the chatter.
‘Given the low levels of growth and meagre increase in core inflation, the ECB were displeased with the rise in European yields in October and November. As such, they will not look to suggest anything at this meeting that might cause a further tightening in financial conditions.’
‘However, given the progress made towards meeting its objectives, not least the rise in inflation expectations, the council will be more divided and the doves will face strong opposition from the hawks, likely resulting in some compromise.’
Nash said they are likely to avoid favouring peripheral bond spreads in the light of the Italian referendum as not to politicise ECB decisions.
‘Collateral availability and the functioning of the securities lending market, a by-product of bond scarcity, will be supported by methods to increase Bundesbank bond lending.’
‘To appease the hawks and to recognise the improving inflation and growth conditions, the duration of the PSPP (public sector purchase programme) extension could be shorter than the market expects, reviewed every three months and considered to be more data-dependent going forward.’
Nash said this would also serve to remove European politics from the decision-making.
Columbia Threadneedle’s Adrian Hilton, who works on the European bonds team, said there could be scope for disappointment if an extension takes time to come into effect.
‘The Governing Council may feel some pressure to stress that QE does not have an indefinite lifespan. There may also be some disagreement over whether the stock or flow of QE is most important.’
‘For markets, the flow matters most and there is scope for disappointment if the extension is to be conducted at a slower pace than the current €80 billion per month.’
Hilton also said the ECB may choose to tweak the programme to ensure they don’t run out of the available stock of other bonds.
‘The rise in yields since the US election has brought many more bonds into the ECB’s purchase universe but they may still choose to tweak the parameters of its programme in order to ensure that they do not exhaust the available stock of German bunds before the end of the programme.’