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ABN Amro Warns There Is A 40% Chance Mario Draghi Expands ECB QE "As Soon As This Week"
Last week, when we quantified what China's reserve unwind, aka Treasury liquidation, could mean in practical terms, we quoted Bank of America which put the total Reverse QE figure as we dubbed it (or Quantitative Tightening in DB's terms), at between $1 trillion and $1.1 trillion.
At the same time, Deutsche Bank added fuel to the fire, when it noted that "the potential for more China outflows is huge: set against 3.6trio of reserves (recorded as an “asset” in the international investment position data), China has around 2trillion of “non-sticky” liabilities including speculative carry trades, debt and equity inflows, deposits by and loans from foreigners that could be a source of outflows (chart 2). The bottom line is that markets may fear that QT has much more to go."
Deutsche was kind enough to provide a silver lining to this otherwise dreary forecast: "What could turn sentiment more positive? The first is other central banks coming in to fill the gap that the PBoC is leaving. China’s QT would need to be replaced by higher QE elsewhere, with the ECB and BoJ being the most notable candidates."
And there it is: the only thing that can offset the synthetic inverse QE that China and/or the rest of the EMs embarked on as Zero Hedge first warned last November, is more quite tangible QE conducted elsewhere, ideally at the ECB (which is currently 6 months into its first QE episode), or Japan (although the ceiling to debt monetization there may have been already hit with the BOJ already monetizing more than 100% of all gross issuance) but not the Fed, whose rate hike intentions are what started this entire global reserve liquidation fiasco in the first place.
Fast forward to today, when just two days before the September 3 ECB governing council meeting and press conference, ABN Amro released the genie from the bottle, when its head macro strategist Nick Kounis said the he now sees "a much bigger risk that the ECB will step up QE as soon as this week’s meeting. We see this probability at around 40%, so it is an increasingly close call. The renewed drop in oil prices, which will keep headline inflation lower for longer is a key factor behind the rising risk of action in our view. This has also led to a sharp fall in inflation expectations, as measured by the 5y5y inflation swap, that ECB President Draghi has put a lot of weight on in the past (see chart)."
Why only 40%?
Our base case of no further QE ( now with a 60% chance) is still supported by indications that a moderate economic recovery is continuing, and by the bottoming out of core inflation. In any case, we expect Mr. Draghi to step his dovish rhetoric at this week’s meeting.
However, not even Kounis is so bold as to suggest that the Fed will scrap its rate hike strategy and proceed straight to more QE:
we have changed our forecast of the timing of the first rate hike by the Fed to December from September previously. There is still a chance of a move next month, given the ongoing strength in the economy and the labour market. However, we think that the FOMC will take a cautious approach given the ongoing fragility of financial markets (for instance, the VIX is still above its long-run average level). Officials may therefore decide that it makes sense to wait and see rather than risk rocking the boat. In addition, by December, the Fed will also have a better insight into how China and the global economy in general are developing. With inflation subdued it may well judge it can afford to take its time. So overall, we now expect one hike in Fed’s target for the fed funds rate this year, compared to two previously. We continue to expect four rate hikes next year, meaning a one-every other- meeting pace.
What does this mean for asset prices? Well, not much apparently with forecasts for US and German TSYs largely unchanged:
We now expect 10y Bund yields to remain broadly flat over the next few months, with an end of year forecast of 0.7%. Although the economic recovery should gain some pace, ongoing speculation about further ECB monetary easing should keep yields anchored. We still expect yields to rise next year (to 1.6% by end-2016). Meanwhile, we still expect 10y Treasury to rise this year and next, but the rise is likely to be more moderate than before – especially in the next few months - given less Fed hikes. We see yields rising to 2.4% by year end and 2.8% by the end of next year.
Perhaps ABN's boldest call is on the EUR, which the Dutch bank sees at parity by year end.
All of this is reasonable, and the only fly in the ointment would be if the Fed does indeed take a hard right turn sometime in the next 3 weeks and decided that not only is a rate hike now impossible (and with the global and US economy rapidly stalling, would unleash the ghost of 1937 all over again as we previewed before) and would be in fact destructive to not only the economy but also confidence as measured by the S&P, but potentially pull a Bullard, and hint that should the market drop not stabilize, the Fed is ready to use "unconventional tools", even if one considers that over the past 7 years, QE has become the most conventional - and only - tool left in the Fed's arsenal.
Finally, while we agree with ABN that the ECB may indeed boost QE in a rerun of what the BOJ did in the great Halloween massacre of 2014, it would be largely a non-event, as the ECB biggest limitation remains the availability of monetizable assets. As such, any real monetary offset to the Reverse QE that is about to be unleashed now that the "Great Accumulation" is over, is and will always be the Fed. For a quick explanation of this, re-read "Why QE4 Is Inevitable."
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So a 40% chance of "make it rain in the club"?
How do you calculate the risk of QE at 40% without even crackin’ a smile?
Wouldn’t 39% be more realistic? ;-)
Looney
Draghi: Crew Slut extraordinairre.
The boys in the crew, are only waiting for you.
/zappa
Of course i'll introduce you to Warren
The boys in the crew, are only waiting for you
Cause when you need a little extra
They will give you some mo'
I get a bigger 'crackin' smile' from just reading a report from ANBA..... Used to work there and decided to leave when an internal analysis was bearish on the EUR/USD (2009-ish)but the report was not allowed to leave the office since it was against ECB/government policies... (remember, ABNA was just bailed out by government). If analists become mere propaganfists (no typo) --> time to leave.... :)
And yet Euro is surging today.
Today's 3:30 ramp had better stick or some NY Fed asses are on the line.
Colin Quinn’s ‘Unconstitutional’: Comedian skewers political correctnesshttp://tinyurl.com/pondm5y
Anyone who takes a look at the e-mini charts can see that someone has been buying starting at the London open at 3AM NYT. I blame the ECB. What will taking liquidity out of the bond market accomplish? Nothing. Everyone is already primed for it to fail based on what has happened in the US and in Asia.
CURRENCY PUPPET WAR VERSION 29483
IT'S ON BITCHEZ!!
ASK NOT WHAT WOULD JEZUS DO BUT ASK WHAT DONALD DUCK WOULD SAY!!
One can safely predict that gold and silver will actually fall on a new European QE. Welcome to free and fair markets of the West.
Until 'gold' is no longer paper gold, it will behave as a paper asset. It is just another fractionally reserved, leveraged, nothing real to see here way to bet the day to day changes in this crazy monetary system. Only central banks and savers need metal.
Events are accelerating. Big events that have big impacts. Something will fall or hit the wall.
So the bet is the Draghi will do to the Euro what Alan, Ben and janet have done to the dollar....zee Germans veel not like zat.
zee dent wike et, bitt wheel sapurts zit
The ECB and their QE are different animals, so we'll get a different kind of fuck up, not better, just dfferent......
It all ends up on the bottom line.
It all ends up on the bottom line.
No Plan B..
Lets slap some moar lipstick on that bloated pig. What part of overcapacity, and lack of demand does Draghi not understand?
All this will do is cause more devaluation and unease globally. Someone needs to shove a huge dildo slathered in Tabasco Sauce up Draghis ass hole.
Shhhh... You'll spoil the surprise.......
I HAVE TRIED "TABASCO' - ITS FUN AT FIRST - BUT 20 MINUTES IN ---- OUCH!
You forgot the wire brush to clean his rectum out first.
Lets do QE in Europe..and we raise rates...that will get the party started...lol....popcorn is all I can say
This is more jawboning bullshit.
In case you haven't peeked lately, Italy and Spain are in a neck-and-neck race to see who owes more of the 600'ish billion TARGET2 credit card bill to Germany and Luxurybourg.
This is more "Whatever" from Draghi and the ECB. Buying bonds above par to lock in a loss on each one. Humm. Whatever.
Basically he is panic'ing as BRICS money flows are moving out of the Squirm-merging markets by the boatload and into safe havens such as the Euro and USD. What I haven't figured out is why the Yen is catching a bit, except it does seem to be linked to (inverted) movements on the SPX. As the SPX cliff-dives, the Yen gets stronger relative to the USD. Go figure.
Just send me some QE money! I promise to spend all of it.
Who is going to buy $1tn of UST off China?
Bill Gross?
USA said they were going to sanction China next for the so called ''hacking''. Hang on folks, its going to get rough this month
Also I don't see China taking kindly to CIA blowing up in Tanjin