The attempt to reassure the markets on the timing of the monetary policy reversal succeeded only in part……
As expected, the July ECB meeting brought no changes in terms of non-standard measures. President Draghi used accommodative tones in his address, generally in line with the June speech. The statement confirmed the ECB’s easing bias on purchases, as well as the fact that rates will stay at their current levels well beyond the unwinding of the APP.
At the July meeting, the ECB only discussed the evolution of macroeconomic prospects and of financial conditions, concluding that the overall picture has changed little compared to June. Draghi clarified that his speech in Sintra did not introduce substantial developments, thus implicitly suggesting that the market had read non-existent implications in it. In July, the Council acknowledged “unquestionable” improvements in the macroeconomic outlook, while confirming a balanced assessment of risks to growth, as despite the positive surprises from macroeconomic data, uncertainty remains high on the prospects for the international scenario. Although the growth picture is improving significantly, indications that underlying inflation is increasing remain unconvincing and, in any case, inflation is still far off the levels desired by the Council. Therefore, the statement reasserts that it is necessary to keep a high level of monetary stimulus in place to help inflation return towards 2%.
Draghi, during the press conference, reported that the Council unanimously deemed it appropriate to confirm its easing bias on purchases, to counter the risk of an unwelcome tightening of financial conditions, which may slow or even compromise the recovery. For what concerns the future of the purchase programme, Draghi provided no indications. He specified that the Council has still not agreed on a specific date on which to begin discussing the timing and technicalities of the purchase programme tapering, simply indicating that this will take place in the autumn, when more information will be available on the outlook for inflation in the medium term, and the evolution of financial conditions. The autumn will begin after the meeting on 7 September, although Draghi let on that the discussion will start on that date, when the Council will be able to assess updated growth and inflation forecasts.
On the whole, the ECB reasserted a very cautious approach to reviewing monetary stimulus, and its commitment to be “persistent” in supporting the recovery. In the present phase, the priority is to reassure the markets ahead of the summer break, easing the fears of an impending unwinding of the purchase programme that had emerged following Draghi’s address in Sintra at the beginning of July. The operation was successful only in part: while the bond market reacted with a modest correction in yields, the EUR/USD exchange rate soared to its highest level in almost two years. Rather than the evolution of rates, the trend of the euro reflects the renewed appeal of the euro area markets, after the French elections dissolved fears of an imminent terminal crisis of the monetary union, and the weakening prospect in the United States of an expansionary fiscal reform.
If July and August data confirm that growth is proceeding at above potential rates, the ECB could initiate the discussion on exiting QE already in September. On that occasion the ECB could change its communication on purchases, indicating that it is ready not only to step them up, but also to reduce them, and that in any case it will be active on the market for the better part of 2018. The extension of the programme, at reduced volumes and subject to review in the opening months of 2018, could then be announced at the meeting at the end of October, or in December.
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.