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Sunrise Market Commentary

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ECB's Weber remains sceptical about asset purchases

Wed, Apr 22 2009, 07:30 GMT
by KBC Market Research Desk

KBC Bank

Markets: Fixed Income

On Tuesday, swings in equity investors’ sentiment sent government bonds first higher just to fall sharply lower later in the session. During the morning session, European equities traded rather weak and declined gradually, even in spite of the better than expected German ZEW index. Equity markets however reversed course during the US trading session, following comments of US Treasury Secretary Geithner who indicated that the ‘vast majority’ of US banks have more capital than needed.

On the bond markets, bonds reversed (part of) Monday’s gains, but remain broadly sideways oriented. In the US, yields were 2.4 to 7.3 basis points higher, despite the purchase by the Fed of $7B Treasury issues maturing between 29/2/2016 and 15/2/2019. In Germany, short-term yields were higher too (2.4 to 0.6 basis points), but the long end lagged (-0.9 basis points). The more limited increase in yields was partly due to the earlier closing hour. Overall, German bonds slightly outperformed the other European bond markets, where Greece underperformed ahead of today’s budget.

ECB’s Weber remains sceptical about asset purchases

Today, the euro zone calendar is empty and also in the US, the calendar is thin with only the February house price index and weekly mortgage applications. The house price index is forecasted to show a decline by 0.6% M/M after rising by 1.7% M/M in February.

On the supply front, Italy will detail which BTPs and CCTs it plans to tap at the next auction scheduled for the 29th of April. Yesterday, Ireland sold €0.3B of its 4% 2014 bond and 0.7B of its 4.5% 2018 bond at a bid/cover ratio of respectively 1.6 and 1.1. The very low bid/cover ratios signal that demand for longer-term bonds remains fragile. Overall, the intra-EMU sovereign spreads widened slightly for the second consecutive day. Greece underperformed quite sharply ahead of today’s budget, as the spread over Germany widened by 10 basis points.

On the ECB front, ECB’s Quaden will speak at a press conference on the revision of the Belgian business confidence indicator. Until tomorrow’s non-monetary policy meeting, we don’t expect to hear more details on which unconventional measures the ECB will announce at their next policy meeting in May. Interestingly, yesterday both the Swedish Riksbank and the Bank of Canada cut interest rates close to zero and indicated that they will keep rates low for a prolonged period of time, but refrained from announcing a quantitative easing policy in the form of purchases of government and/or corporate bonds. The Bank of Canada did however extend its Purchase and Resale Agreements into six- and twelve-month terms. The decisions from the Riksbank and the Bank of Canada indicate that a quantitative easing policy shouldn’t be seen as a given and raise further doubts as to whether the ECB will announce a private asset purchase programme in May. In an interview with the FT, ECB’s Weber indicated that recent policy action from the ECB has been quite effective and urged not to underestimate the power of an extension of its refinancing operations combined with a clear signal that rates are going to remain as they are for some time. The purchasing of government bonds, he called ‘a not desirable option’.

Regarding trading, government bonds continue to trade quite volatile, but in the end, little has changed and bonds are still within recent trading ranges. In the Bund, this short-term trading range is seen between 121.61 and 123.14. We were looking to install new long positions in case of a test of the contract lows at 120.37, but the correction didn’t go that far. As such, we have a more neutral view on the outlook now. Besides the eco data, sentiment on the equity markets may prove again decisive for today’s trading. The 877 level in the S&P remains the key level to watch out for. A sustained break higher may still lead to a test of the downside.

In the UK, Gilts underperformed the German bond market following comments of BoE’s Fisher, who said that the £75B quantitative easing plan is ‘about the right size’. This suggests that the Bank of England may make no use of the other £75B available to the programme.

Today, the calendar is well-filled with the BoE Minutes, jobless claims (March) and public sector borrowing data. Most attention will however go out to the Budget. The budget will show a sharp downward revision of the growth forecasts as well as a sharp upward revision of the deficit. This was seen at £118B in 2009-2010 and at 105B in 2010-2011, but may be revised up to around 160B for this fiscal year and to 167B next year. Following the presentation of the budget, the DMO will announce its revised funding plans, which may amount to 180B of Gilt issuance, 30B higher than this record fiscal year. The funding plans may rely mainly on shorter-term Gilt auctions and Linkers, as long-term Gilt auctions didn’t go well recently.

Regarding the Minutes, the voting result is likely to be unanimous, but attention will be focused on the BoE’s asset purchase programme. At the April meeting, the MPC decided to maintain its target of £75B of asset purchases. It’s probably too early to gauge the effectiveness of the quantitative easing policy, as most hard data still date from for the start of the operations.

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Published on  Wed, Apr 22 2009, 07:35 GMT