With everyone confused over why Draghi has put himself in a position from which he can't deliver and satisfy the market one hour ahead of the ECB announcement, and everyone placing their last bets on the EUR and the SPGBs before the ECB press release hits without really having any clue what the Italian has in store that will make both the EuroStoxx and the Bundesbank happy, here are some additional last minute "insights" from Deutsche Bank that promise not to clarify the situation all that much. Because while "We'll be honest and say we've been totally confused about what to expect from the ECB ever since Draghi's speech last Thursday" DB does say: "In short it doesn’t look like we will get any explicit action today." Clear as mud.
From DB's Jim Reid:
We'll be honest and say we've been totally confused about what to expect from the ECB ever since Draghi's speech last Thursday. Prior to the speech, we did think the market would start to price action in the week leading up to the meeting but when we first considered Draghi's comments we didn't actually think it changed much. However on reflection it’s likely that the speech marked a change in Draghi and was perhaps his way of highlighting his desire to build a consensus across the ECB and Governments towards more aggressive action. The problem is that his strategy is high risk enough that if he doesn't deliver something today then he will have credibility issues going forward.
Anyway as the issue has been wrong-footing us over the past 7 days we'll review what our European Economists think we can expect from the ECB. They think there could be just an outline of a conditional framework for assisting Spain and/or Italy. Immediate ECB secondary market purchases are probably not on the agenda as the ECB are unlikely to intervene until the countries have applied to the EFSF and signed an MoU. An ESM banking license is also a non-starter, as it would be renouncing ECB's implicit seniority. New vLTROs do not appear to be on the menu either as the most recent Bank Lending Survey wasn’t bad enough to warrant a liquidity response. Our economists are also not expecting a rate cut. So it looks like at best what we may get is some kind of collateral easing targeted at Spain just to ensure that the domestic banks have the collateral to get the sovereign through the next several weeks. In short it doesn’t look like we will get any explicit action today.
A Reuters article overnight (citing a local German paper), said that Draghi will unveil a two-pronged approach today (ie having the ESM and ECB involved in sovereign bond purchases) but that it’s unlikely we get an official decision today on these proposals. Indeed it looks like Draghi will just elaborate in more concrete terms on what he said last week but a final decision is not expected until after the German Constitutional Court rules on the ESM after 12 September.
So we're back to our thoughts from two weeks ago that the market would start to get excited ahead of today but that there would be scope for disappointment after. However anything can happen today and its therefore best to keep an open mind and be nimble. The most likely outcome is that Draghi dangles a tempting carrot in front of the market but doesn't actually feed us all. A framework for how the ECB intervenes once countries request ESM involvement is probably a realistic thing to watch for.