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With Expectations Sky High, Draghi Prepares To Whip Out Bazooka But Beware Water Pistols

Tyler Durden's picture




 

Mario Draghi is on deck Thursday morning and market expectations could scarcely be higher. In fact, Draghi is widely expected to execute the Keynesian trifecta, i) a rate cut, ii) expansion of QE, and iii) extension of QE duration. 

For better or worse, the ECB has gained a reputation of over-delivering and that means, as Bloomberg put it earlier this week, Draghi cannot back down now. 

So what, precisely is everyone pricing in, you ask? Well that’s difficult to say. That is, it’s never really clear what’s “priced in” and what isn’t until after the fact, but as Credit Agricole notes, the market generally expects a PSPP extension of six months, a PSPP expansion of €15-20 billion in monthly purchases, and a depo cut of 10 or 20 bps. Anything short of those estimates is “hawkish” we suppose (how absurd is that?) and anything beyond that will be enough to make the Riksbank, the SNB, the Nationalbank, and the Norges Bank nauseous. 

The market will also be watching to see if the ECB intends to introduce a two-tiered NIRP application regime which, if implemented, should give Draghi more room on the depo rate and may also ease the extent to which what the ECB does has an outsized effect on the EURCHF cross versus other pairs.

Speaking of deleterious NIRP effects, euro area banks are starting to get nervous about the persistent NIRP erosion. For his part, Peter Garnry, head of equity strategy at Saxo Bank, in Copenhagen, says stay the hell away from banking stocks. "Loose monetary policy, weaker euro stimulate exporters and consumer-related sectors, but banks’ net interest margins are squeezed," Garny says, addint that the "sector faces very negative rate environment, increased competition, and rising regulatory pressure." Most at risk are: Commerzbank, BBVA, Banco Santander, Barclays, StanChart. "Banking stocks should be avoided at all costs," he warns. Echoing that sentiment is Morgan Stanley ("Worry that ECB policy may squeeze the banks again because a negative deposit rate is a tax on banks; QE has often led to compression in net interest rate margins"), Deutsche Bank ("Material medium-term NIM pressures are inevitable in the context of lower-for-longer rates, especially for Germany, Italy and Belgium), and SocGen ("With more ECB easing, stagnant revenue environment would increase need to look for other drivers of earnings"). The following pie chart from Citi should give you an idea of which MFIs suffer the most under the NIRP regime:

In addition to expansion, extension, and the depo cut, observers will also be interested to see if Draghi makes any changes to the list of eligible paper. 

Obviously this is a tall order, and as SocGen put it this morning, "with high expectations comes a high risk of disappointment." "The high bar set by expectations, coupled with notable opposition against aggressive action on the Governing Council as economic data developed largely as expected, creates a risk that the ECB will under-deliver," MNI wrote earlier this week. Consider the following from Credit Agricole:

The more important point here is that the Governing Council may struggle to exceed the overly dovish market expectations. Indeed, our recent discussions with a number of clients from the leveraged and the real money community suggested that investors are going into the meeting holding short-EUR positions with many expecting Draghi to over-deliver. According to some, the ECB is trying to replicate the BoJ experience of triggering a massive FX depreciation that will help reignite Eurozone's headline inflation. 

 

We disagree. For a start, we note that the Governing Council's focus has now shifted from lifting headline towards boosting core inflation. According to the ECB's own estimates, the pass through effect from FX depreciation to core inflation should start to manifest itself only after two years and can take up to three years to play out in full. Any policy that targets core inflation gains is taking into account the considerable lag between the policy implementation and the economic outcome. In addition, the policy makers are also conscious of the impact of other drivers like the still sizeable output gap in the Eurozone as well as external factors like the ongoing global currency wars and the gradual Fed tightening cycle expected to start on December 16. 

Here's Deutsche Bank's best effort at explaining what's priced in:

And here's Citi's take on what the options are in terms of various combinations of increased purchases and program duration extension (the blue boxes represent Citi's baselines): 

As for how to trade this mad rush further into the Keynesian Twilight Zone (because that's what it will be, even if Draghi does under-deliver) Bloomberg notes that EUR may drop below its March 16 low of 1.0458 should the ECB exceed mkt expectations on more monetary stimulus expansion today; currency could test 21-DMA at 1.0681 if the central bank meets expectations or short-squeeze toward 1.0830 Nov. 12 high on any hawkish surprise from Draghi." Here's the full cheat sheet: 

  • Positioning, according to three traders in London and one in southern Europe:
    • Interbank and leveraged names go short into meeting, real money names may need to chase price action lower
    • Bids at 1.0500/10, 1.0450/55, 1.0320/30
    • Offers at 1.0640, 1.0720, 1.0800/20
    • Large 1.05 and 1.04 barriers protection
  • Expiries
    • 1.04 (EU1.85b), 1.0450 (EU1.79b), 1.05 (EU3.77b)
    • 1.06 (EU2.78b), 1.0650 (EU1.48b), 1.07 (EU1.39b)
  • Support
    • 1.0500
    • 1.0458 March 16 low
    • 1.0336/42 Jan. 2/3 2003 double-bottom
  • Resistance
    • 1.0681 21-DMA
    • 1.0764 daily trendline since Oct. 23
    • 1.0830 Nov. 12 high

Finally, for anyone curious as to where Draghi's former employer sees the EUR going, Goldman says a "dovish surprise" will drive the euro down to about a 12-year low of $1.03. 

That concludes your full Draghi bazooka preview. Trade accordingly.

 

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Thu, 12/03/2015 - 08:14 | 6869905 SheepDog-One
SheepDog-One's picture

It's just sad how the bar has been lowered so much that everything rides on what some douche in Europe may or may not say. Pathetic.

Thu, 12/03/2015 - 08:20 | 6869911 VinceFostersGhost
VinceFostersGhost's picture

 

 

I feel some irrational exuberance coming on here.

 

Let's roll!

Thu, 12/03/2015 - 08:34 | 6869928 The Pope
The Pope's picture

Well gosh golly geewhillikers, it's as if Goldman Sachs doesn't already know what will happen.

Thu, 12/03/2015 - 09:08 | 6870015 BennyBoy
BennyBoy's picture

"With Expectations Sky High, Draghi Prepares To Whip Out Bazooka But Beware Water Pistols"

 

Cover all bases with insipid headline.

Where's the FEAR!?

Thu, 12/03/2015 - 08:50 | 6869969 yogibear
yogibear's picture

"how the bar has been lowered so much that everything rides on"

The algos go heavily bullish when Draghi says "QE:" and "whatever it takes".

It's "whatever it takes" is the key phrase all the bankster's trading system anticipate  a ramp upwards.


Thu, 12/03/2015 - 08:14 | 6869906 Racer
Racer's picture

I would rather burn my money than pay a bankster to hold it for me

Thu, 12/03/2015 - 08:21 | 6869915 DeadFred
DeadFred's picture

Gold burns? I didn't know that. Oh, you mean that fake money.

Thu, 12/03/2015 - 08:23 | 6869921 VinceFostersGhost
VinceFostersGhost's picture

 

 

Gold purifies......fiat burns......bitcoins just go back to the air.

Thu, 12/03/2015 - 08:40 | 6869954 tc06rtw
tc06rtw's picture

   
 Bitcoins work,  as long as you believe in them.

Thu, 12/03/2015 - 08:53 | 6869970 VinceFostersGhost
VinceFostersGhost's picture

 

 

I want to believe.....but I have common sense.

 

I do this little thing.....it's called thinking.

 

If bitcoins ever get on the periodic table....I might change my mind.

 

It's not really my fault. When I went to school....we didn't have Common Core.

Thu, 12/03/2015 - 08:20 | 6869912 wmbz
wmbz's picture

"Mario Draghi is on deck"

It should read...Mario Draghi is on the dock today... and will be hung by the neck until dead!

Of course no such luck, just the same old shit!

Thu, 12/03/2015 - 08:20 | 6869913 madbraz
madbraz's picture

congrats to the robin hood in reverse who came from the holy goldman and delivered to italy (and spain) the gift of being able to go into debt and be paid to do so (2 year yields negative).  such incentive for those responsible countries to stop bleeding public spending and rob from their own people.

 

such leaders we have today.  a financial hitler would be proud.

Thu, 12/03/2015 - 08:32 | 6869939 VinceFostersGhost
VinceFostersGhost's picture

 

 

such leaders we have today.  a financial hitler would be proud.

 

Heil Paul Ryan.

Thu, 12/03/2015 - 08:39 | 6869948 The Pope
The Pope's picture

Keep reminding us that it was 'Hitler' that was pure evil (& not these people).

 

FFS, if you're a zio banker/propagandist, Hitler represented the golden pinata of your everlasting dreams.

Thu, 12/03/2015 - 08:30 | 6869927 herkomilchen
herkomilchen's picture

For what it's worth, this will be good for the U.S. economy.

As Draghi trashes the European economy and currency even more heavily than the Fed is trashing the U.S. economy and currency, it will provide the same opportunities for the more productive U.S. to sell more stuff to the more impoverished Europeans as was experienced at the end of WWII.

Very sad for hapless individuals over there who oppose Keynesianism, but just deserts coming up for all the rest who support it.

Thu, 12/03/2015 - 08:31 | 6869934 Bill of Rights
Bill of Rights's picture

For what it's worth, this will be good for the Chinese economy.  As Draghi trashes the European economy and currency even more heavily than the Fed is trashing the U.S. economy and currency, it will provide the same opportunities for the more productive Chinese to sell more stuff to the more impoverished Europeans.  Very sad for hapless individuals over there who oppose it, but just deserts coming up for all the rest who support it.

 

Fixed it for you, last I checked  " Made in the USA "  went the way of the Dodo bird, what " Stuff " do we produce that Europeans desire?

Thu, 12/03/2015 - 12:03 | 6870853 herkomilchen
herkomilchen's picture

Movies?  Whiskey?  :)

Ok, tech innovation.  We've still got that going on.

Thu, 12/03/2015 - 08:41 | 6869955 thepigman
thepigman's picture

Har.... Smoot Hawley cheerleading squad?

Thu, 12/03/2015 - 08:28 | 6869929 Bill of Rights
Bill of Rights's picture

They managed to get Silver to the $13 handle, mission complete...

Thu, 12/03/2015 - 08:32 | 6869942 Youri Carma
Youri Carma's picture
Watch for U.S. recession, zero interest rates in China next year, Citi says
2 December 2015, by Jamie McGeever - London (Reuters)
http://www.reuters.com/article/2015/12/02/us-global-economy-idUSKBN0TL18F20151202
Thu, 12/03/2015 - 08:32 | 6869943 stocktivity
stocktivity's picture

The rich fat bankers want it all.  They are destroying the middle class in the process. Fat fucking pigs!!!

Thu, 12/03/2015 - 08:35 | 6869947 cn13
cn13's picture

Nothing but shear desperation.

The funny thing is, people assume the Central Banksters know what they are doing.

Thu, 12/03/2015 - 08:55 | 6869978 Baby Eating Dingo22
Baby Eating Dingo22's picture

That's the problem

They know exactly what they're doing

 

Thu, 12/03/2015 - 08:45 | 6869951 thepigman
thepigman's picture

Actually, this is just additional recognition that Europe is a complete basket case. Nothing that Draghi does

works.

Thu, 12/03/2015 - 08:39 | 6869953 buzzsaw99
buzzsaw99's picture

listen to this putrid fuck lie like a mother fucker:

 

Echoing that sentiment is Morgan Stanley ("Worry that ECB policy may squeeze the banks again because a negative deposit rate is a tax on banks; QE has often led to compression in net interest rate margins")

nirp is a tax on savers, NOT FUCKING BANKS> as for margin compression fuck those muther fuggers. die bitchez! everything is about them. whiny little fucking bitchez have assholes for excuses. god damn fuck those smarmy FUVKS!@

Thu, 12/03/2015 - 08:42 | 6869958 Racer
Racer's picture

The Dax has gone nuts! Something leaked?

Thu, 12/03/2015 - 08:43 | 6869960 Atomizer
Atomizer's picture

One point not mentioned, continuing illegal immigration expansion. 

;)

Thu, 12/03/2015 - 08:57 | 6869980 Atomizer
Atomizer's picture

Thanks. Looks interesting based on comments. Will watch. 

Thu, 12/03/2015 - 09:04 | 6870000 THE DORK OF CORK
THE DORK OF CORK's picture

Well not really.

It has confirmed my beliefs about these socialists

Check out minute 59 ,  Yanis V states and I kid not - we will come to love the euro project when Mario signs and distributes euro food stamps (not euros)

Democracy without a equity stake in the commons which includes money is fake.

Yanis V is a classic establishment figure.

Thu, 12/03/2015 - 08:51 | 6869968 Baby Eating Dingo22
Baby Eating Dingo22's picture

Christ

Drops on unconfirmed rumor of no cut

Only to be followed by triple surge back up when rumor is dispelled

La la la la la

7:43a Stock futures halve gains on unconfirmed FT report of no ECB rate change
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