By Avantika Chilkoti
A month ago, investors were betting the European Central Bank
would make a splash. Now they're not so sure.
Economists broadly expect the ECB on Thursday to reduce its key
deposit rate by at least 10 basis points, or a 10th of a percentage
point, from the current level of minus 0.4%. But expectations for
the size of the monthly bond-purchase program that might also be
announced have been eroding, a move that has helped keep once
free-falling bond yields in place this month.
The recent volatility reflects shifting views on the appetite
for a sizable stimulus package among ECB officials, as President
Mario Draghi prepares to hand off the reins on Nov. 1 -- and,
according to some portfolio managers, an overdue reckoning with the
market's earlier wishful thinking.
"The market is very overexcited" about both the magnitude of the
stimulus measures and the likelihood they will be effective in
boosting economic activity across the eurozone, said Colin Harte,
head of research in the multistrategy team at BNP Paribas Asset
Management. Like many investors around the globe, he believes
sluggish Western economies are unlikely to recover their former
vigor without an aggressive government-spending plan that could
over time significantly boost employment, wages and demand for
goods and services.
"We doubt how effective monetary policy is, without fiscal
expansion," he said.
The yield on 10-year German government bonds, which had dropped
to as low as a record minus 0.742% on Sept. 3, recovered to minus
0.538% on Wednesday. That is still significantly lower than the
yield of minus 0.405% on July 25, when the monetary authority said
it was "determined to act" to bolster inflation. Yields fall when
bond prices rise.
In anticipation of the stimulus package including the asset
purchase plan, commonly known as quantitative easing, European
companies are already selling bonds. In the two weeks from Aug. 26,
about $33.58 billion of investment-grade debt was issued by
companies in the region, according to Dealogic data, up from $9.63
billion in the previous two-week period.
But in recent days, some investors have started questioning if
Mr. Draghi will hold off this week on offering specific details
about the quantitative-easing program, while others have speculated
that the ECB could surprise the market by opting to include bank
credit, equities and exchange-traded funds in that plan. There is
also an expectation that the ECB is likely to take steps to make
negative rates less painful for banks.
As hopes of the fresh asset-purchase program mounted, investors
piled into Italian and Spanish government bonds, which offer
positive yields. The yield on 10-year Italian debt dropped to
0.801% on Sept. 4, from 1.526% when the monetary authority last
met, while the yield on equivalent Spanish debt fell to 0.031% on
Aug. 16 from 0.365%. Still, both yields have rallied slightly in
recent days as the market pared back its expectations.
The market is also closely watching for stronger links between
the forward guidance and inflation. The ECB's decisions could have
significant implications for the eurozone's troubled economy, which
has been racked by uncertainty over Brexit, global trade tensions
and China's slowdown, a likely recession in Germany and political
turbulence in Italy.
Meanwhile, analysts at BNP Paribas Asset Management continue to
expect the ECB to deliver a 15 basis point-cut to the benchmark
rate and purchase EUR300-400 billion of bonds over a year. That
forecast was considered too low a few weeks ago, Mr. Harte said,
but now appears to be in line with the market's consensus.
He has pared back his own position on European bonds and
equities to slightly underweight in recent weeks, from overweight,
on the expectation that markets might be headed for a
disappointment.
David Zahn, head of European fixed income at Franklin Templeton,
fears the ECB's decision-making committee will struggle to agree on
a package of stimulus measures -- and the need for a new
bond-buying program, in particular -- as they gear up for Mr.
Draghi's likely successor, Christine Lagarde, to take over.
Ms. Lagarde, whose appointment is pending formal approval from
European Union leaders, has pledged to review the costs and
benefits of controversial ECB policy tools such as negative
interest rates and large-scale bond purchases.
"They might be more open to expressing disagreement," Mr. Zahn
said. He plans to buy up long-dated bonds and Germany government
debt, in particular, if the market sells off on Thursday.
There is also concern that further rate cuts and quantitative
easing might do little to boost growth and inflation, according to
Moritz Sterzinger, a director at financial-advisory firm JCRA.
Monetary easing amounts to "pushing on a string," he says, but
disappointment on Thursday could roil markets.
"If the message is not quite as dovish as the market makes it
out to be, I would expect there to be quite a big countermove
again," he said.
Paul J. Davies in London contributed to this article
Write to Avantika Chilkoti at Avantika.Chilkoti@wsj.com
(END) Dow Jones Newswires
September 11, 2019 05:50 ET (09:50 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.