Photo: European Commission
This is a great sumup of the expectations surrounding this Thursday’s ECB decision. It’s from Citi’s Steven Englander:Comments by ECB President Draghi had a direct impact, narrowing 10 year Spanish spreads with Germany about 90bps and 5 year Spanish Sovereign CDS about 100 points. Italy has tightened 55bps on 10 year spreads and 70bps on CDS. European bank stocks have turned up 16% since Draghi’s comments were released. Although the EUR has pulled back from its Friday peak amid widespread discussion of ECB dissension, there is no indication that the market view that ‘something will turn up’ at the ECB meeting has dissipated. The modal investor seems to think that there will be an SMP event, whether an indication of immediate outright buying or a firm indication that buying will be resumed. A rate cut or LTRO is unlikely to satisfy these expectations. Our economists do not expect SMP purchases to resume in the absence of a formal request for assistance from Spain. We think this will disappoint FX investors unless there is a clear indication is that such a request is coming and the program is ready to roll.