Previewing The ECB (No) Decision: The Four Possible Scenarios

Tyler Durden's picture

Over 92%, or 62 of 66 economists surveyed by Bloomberg, expect no surprises from the ECB in half an hour. Whether that guarantees a "surprise" we leave it up to readers, but here courtesy of ABN Amro's head of macro research Nick Kounis, are the four possible decisions scenarios that Mario Draghi can reveal to the world today.

1. ECB ends SMP sterilization: this is ABN’s central scenario

  • Would more than double excess liquidity, spurring expectations of lower short rates and supporting EGBs -- especially 5Y sector; euro would come under pressure
  • May make investors see ECB QE as more likely, supporting peripheral bonds

2. ECB leaves policy and forward guidance unchanged, without clear signal of easing in March

  • This would disappoint markets, which would start pricing higher short rates; govt bonds would probably sell-off, led by periphery; euro would strengthen

3. ECB cuts rates, possibly alongside ditching SMP sterilization

  • This would likely involve cuts to both refinancing and deposit rates
  • Would probably spur market to expect lower front-end rates, steepen curves, compress peripheral spreads and trigger decline in euro

4. Large-scale QE program: very low probability

  • All EGBs would likely benefit near-term, especially peripherals due to hunt for yield; euro would “fall off a cliff”

Source: Bloomberg