Previewing Today's Main Event And Overnight Summary

There is only one event on pundits and traders minds today: the ECB's press conference, during which Draghi will announce nothing material, as the substance of the bank's message has been leaked, telegraphed and distributed extensively over the past three weeks before just to gauge and test the market's response as every part of this latest "plan", which is nothing but SMP-meets-Operation "Tsiwt" was being made up on the fly. And not even a weaker than expected Spanish short-term auction in which €3.5 billion in 2014-2016 bonds were sold at plunging Bids to Cover, sending yields paradoxically spiking just ahead of what the ECB should otherwise announce will be the buying sweet spot, can dent the market's hope that Draghi will pull some final detail out of his hat. Or any detail for that matter, because while the leaks have been rich in broad strokes, there has been no information on the Spanish bailout conditions, on how one can use "unlimited" and "sterilized" in the same sentence, and how the ECB can strip its seniority with impairing its current holdings of tens of billions in Greek bonds without suddenly finding itself with negative capital. Elsewhere, the Swedish central bank cut rates by 25 bps unexpectedly: after all nobody wants to be last in the global currency devaluation race. Ironically, just before this happened, the BOJ's Shirakawa said that he won't buy bonds to finance sovereign debt: but why? Everyone is doing it. Finally, in news that really matters, and not in the "how to extend a ponzi by simply diluting the purchasing power of money" category, Greek unemployment soared to 24.4% on expectations of a rise to "just" 23.5%. This means there was an increase of 1.3% in Greek unemployment in one month.

SocGen previews the main event:

All eyes on the ECB today! After much hope for several weeks and as some information has filtered over the past few days, Mr Draghi will have to deliver concrete measures today to keep from disappointing investors. A 25bp cut in the repo rate is widely anticipated. There will be even greater expectations regarding non-conventional measures, particularly the bond buying programme. These should focus on the short end (up to three years). Yesterday, the talk was about unlimited amounts and sterilisation. What is left to announce? We still need the details on conditionality and when, this will undoubtedly determine the market reaction. Overall, if Mr Draghi simply confirms the information of the past few days, EUR/USD should benefit from an extended honeymoon period. Nonetheless, we will be watching closely as investor expectations are high and Mr Draghi will have to present some fresh elements for EUR/USD to continue to strengthen towards its end-July high of 1.2755. Otherwise, profit-taking could prompt profit taking. We will also be looking at how Spain's 2/10 spread reacts.

For those who missed the key leaks from yesterday here is a summary via Deutsche Bank:

Bloomberg news yesterday suggested that Draghi's bond-buying proposal (apparently dubbed "Monetary Outright Transactions") will involve unlimited purchases of government debt targeting the front end of the curve up to 3 years but subject to ESM/EFSF conditionality. It appears that the ECB will also refrain from publicly setting yield caps and will sterilise the purchases to ensure the actions have a neutral impact on money supply. As DB rates strategist Mohit Kumar pointed out the issue of sterilisation is a bit of a red herring though given the unlimited liquidity operations already in place. Other reports also noted that the ECB is ready to concede its super senior creditor status but rate cuts will not be discussed at today's meeting. For the record the market consensus (and DB economists) is looking for a 25bp cut.


An update on how Draghi is dealing with the ongoing opposition from Bundesbank's Weidmann will probably get some Q&A airtime at the press conference later although German officials yesterday were quick to play down these tensions. German Finance Minister Schauble yesterday dismissed talk of a conflict between the two men. He expressed confidence that the ECB knows its mandate is to protect price stability and not to finance governments. Speaking to lawmakers yesterday, Mrs Merkel said that she backs both Draghi and Weidmann and sees no contradiction in dual support. German MP Norbert Barthle said that Merkel is against unlimited ECB bond-buying but would be willing to accept temporary intervention in the shorter dated bonds. Interestingly CDU deputy leader Fuchs reckons Draghi doesn't have too much support from Merkel but also added that Germany supports ECB bond purchases if there are certain conditionalities. Anyway the ECB's rate decision will be out at 12:45pm (London time) and get your speakers ready for Draghi's press conference at 1:30pm.

Of course, the "conditionality" will be the biggest issue: Spain will not request a bailout as long as its short-term bonds are trading artificially tight on fears of ECB intervention, leading to a Catch 22 outcome. But at least Spain was generous enough to agree to demand money... if there are no new conditions.

Spain is willing to request a full sovereign bailout but without any extra conditions, as the country is unable to finance itself at the high borrowing costs seen recently, especially with debt payments of EUR24 billion due in October, reports El Pais in its Thursday Internet edition, citing government sources.


Spain's Prime Minister, Mariano Rajoy, will try to convince German Chancellor Angela Merkel that Spain is willing to ask for the bailout as long as there aren't any tough conditions attached to it, such as having to cut pensions, adds the newspaper.

Needless to say this will not fly with Germany.

Finally, again from DB, these are the events that America slept through:

Overnight markets are trading with a cautious tone ahead of the ECB event. The Hang Seng (-0.2%) and Nikkei (-0.1%) are both lower while the ASX 200 (+0.7%) is outperforming on a mixed August labour market report in Australia. Headline unemployment fell more than expected (-8.8k v +5k) but unemployment rate was lower than expected (5.1% v 5.3%). Korean markets (+0.2%) are probably helped by statements from the Korean finance ministry that it will focus policy efforts on boosting exports and consumption. In China, rate cut expectations have returned with domestic media pointing out that two previous two PBoC rate moves in June and July have coincided with ECB/BoE meetings (a day later in June and the same day in July).

Turning to other European headlines, the WSJ reported that the Bank of Spain has made available EUR400m of loans to Spanish banks through the Emergency Liquidity Assistance program. The news follows earlier reports from the WSJ that Spanish banks are having difficulty getting funding from the ECB due to the shortage of acceptable collateral. Meanwhile, Germany issued EU3.61bn in 10-year bonds yesterday which fell short of its maximum target of EU5bn.

In terms of the day ahead, we also have BoE policy meeting today. The market is expecting no changes to interest rate and its asset purchases program. Prior to that, we will get the preliminary Eurozone Q2 GDP, French unemployment and German factory orders data. Spain's bond auction across 2014, 2015, 2016 maturities ahead of the ECB meeting will also be interesting. Spanish PM Rajoy will also host Merkel in Madrid today with a joint press conference expected at 1.30pm London time. Draghi and Schauble are also scheduled to speak at an award event tonight in Germany where Draghi will receive an annual award. In the US, the ADP employment change report will be a highlight ahead of Friday's payrolls. We also have non-manufacturing ISM and weekly jobless claims but all eyes will be on Draghi when he takes the mic later today.