ECB in focus

Global equities continued to rally ahead of this afternoon ECB meeting during which Mario Draghi should deliver a massive easing package – at least this is what market participants are expecting. As in the prior 6 days, equities went up with futures on the S&P 500 climbing as much as 0.60% to 3,020 points during the Asian morning before retreating towards 3,005. Across the Atlantic, European futures were also better bid with futures on the EuroSTOXX 50 climbing 0.35% to 3,526 points. Similarly, the German DAX futures inched up to 12,393, up 0.35% on the session. Overall, the risk sentiment remains upbeat as trade optimism prevails after both China and the US made a gesture to ease tensions by delaying partially, or completely, tariffs.

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However, the main event of the main remains the ECB meeting. So far, the market is pricing a 61% chance of 10bps cut to the deposit rate and a 39% chance of a 20bps cut. On the quantitative easing side, it is less clear but monthly purchases of 25bn to 30bn seems the most reasonable option. However, it is worth pointing the board of governors appeared split over the necessity of another round of net asset purchase. As mentioned by certain analyst, the ECB could use trick that would to deliver a massive package while at the same time discounting the total effect of the measure. Indeed, at the moment the ECB is applying negative interest rate to most of the banks’ reserves, unlike the SNB and BoJ. For example, in Switzerland, the SNB applies negative interest to deposit in excess of 20 times the minimum reserve requirement, which means roughly one third of the total deposits are subject to negative rates. This solution has the advantage to make everybody happy: the market has the “new free money” announcement, while the ECB’s hawks are able to trim the real effect of the fresh easing measures QE. Against such a backdrop, it is difficult to say how markets will react, as expectations are sky high.