1、1 18/06/19 Luigi Speranza,Chief Global Economist|Marco Meijer,G10 Rates Strategist,Europe|Sam Lynton-Brown,Head of G10 FX Strategy,Europe|Ankit Gheedia CFA,EQD Strategist|BNP Paribas London Branch|Spyros Andreopoulos,Senior European Economist|BNP Paribas SA Zweigniederlassung Frankfurt Daniel Katziv
2、e,Head of FX Strategy North America|BNP Paribas Securities Corp.ECB Draghis departing shotKEY MESSAGES President Mario Draghis Sintra speech opened the way to additional easing by the European Central Bank,in our view.The ECB could formalise its de facto easing bias as early as the July meeting by a
3、dding“or lower”to its forward guidance of rates remaining“at present levels”.We expect it to cut the deposit rate by 10bp as early as September,probably accompanied by a tiering announcement.In our view,there is now a higher risk of a more adverse scenario that would warrant fresh asset purchases.Ma
4、rio Draghi delivered a powerful message in his Sintra speech,which we found remarkably more dovish than the press conference only two weeks ago.Acts of omission:What Mr Draghi omitted was as important as what he said,in our view.He did not mention the ECBs central case,as featured in the June staff
5、projections and the last press conference.Instead,he started directly by emphasising downside risks.Relatively low threshold:His comments suggest a relatively low threshold for action:“in the absence of improvement additional stimulus will be required.”The posture implicit in the Councils pronouncem
6、ents until now had been the converse that,in the absence of deterioration,no stimulus would be required.Suggestion of urgent action:This sentence is doubly interesting:“In the coming weeks,the Governing Council will deliberate how our instruments can be adapted commensurate to the severity of the ri
7、sk to price stability.”First,the suggested timing conveys a sense of urgency that was absent on 6 June.Second,the reference to“risks to price stability”is one the ECB does not readily use in the context of downside risks except to signal imminent,heavyweight action.The sentence also implies that the
8、se risks are a fact,and it is now just a question of assessing their severity this is a sea change compared with even the most recent ECB communication.FOCUS|EUROPE18 June 2019 Please refer to important information at the end of this reportMARKET ECONOMICS|G10FX|EQUITY&DERIVATIVES|G10 INTEREST RATES
9、 Rates:Consider standing ready to fade todays moves in 5y5y inflation swaps,as we do not expect the EUs inflation problems to be solved with further easing,with or without tiering.FX:ECB easing would be an additional headwind for the EUR.However,with the Fed also expected to ease,we continue to expe
10、ct EURUSD to move higher heading into H2,and we remain long EURUSD in our model portfolio(entry:1.1273,target:1.18,stop loss 1.1100).The most likely beneficiary of increasingly dovish G10 central bank signalling is the JPY,and this weeks dovish shift from the ECB reinforces our bearish view on the E
11、URJPY cross.We remain short EURJPY in our trade idea portfolio,via a 120 European Digital,expiring on 1-Aug-19.Equities:Consider monetising SX7E skew against SX5E skew to implement our view that SX7E is likely to remain range bound in the short term;while tiering of rates could support eurozone bank
12、s in the short term,the prospect of even lower rates is likely to cap the sectors upside.We also think the BNP Paribas French bond-like basket(BNPPFBO1 index)could outperform,as lower for longer rates in eurozone favour bond proxy defensive equities and low volatility strategies again.For more on ma
13、rket views,please see pages 34 MARKET VIEWS 2 18/06/19 Luigi Speranza,Chief Global Economist|BNP Paribas London Branch|Spyros Andreopoulos,Senior European Economist|BNP Paribas SA Zweigniederlassung Frankfurt July easing bias,September rate cut,QE contingent Flagging forward guidance change:Mr Dragh
14、i mentioned explicitly the possibility of a change in bias in the forward guidance.This is a first since the ECB removed the easing bias from its forward guidance in June 2017.We think the forward guidance could be modified already at the meeting on 25 July,preparing for an eventual rate cut announc
15、ement that would require the ECB to introduce tiering.We have long thought that tiering was more likely than not,but following the tight link President Draghi established at the last press conference we now see it being introduced alongside rather than in advance of a rate cut.Flexible purchase limi
16、ts:On the purchase limits for QE,Mr Draghi said that the limits the Council establishes are specific to the contingencies it faces.It suggests that the Treaty allows for flexibility,with the limits set by the ECB rather than set in stone.No hint on consensus:The only thing that suggests continuity w
17、as the reference to policy options having been“raised and discussed”at the 6 June meeting.This is the only weaker point of the speech,in our view,as it gives no sense of whether a consensus exists or how strong it is.Very dovish:The explicit mention of the inflation target being symmetric and hence
18、that a tightening response would require inflation to exceed 2%for some time is very dovish.First,interpreted as a statement of intent,this lowers the bar for action,as ECB projections are barely compatible with what the Governing Council would interpret as its inflation objective,not above them.Sec
19、ond,it appears to be a response to sliding market inflation expectations,abandoning the earlier“we take notice”attitude towards market metrics.What changed?The signals from the bond markets Benot Cur mentioned in a recent interview may have prompted Mr Draghi to move forward from the position establ
20、ished at the last Governing Council meeting.An additional factor may have been increasing indications that the US Federal Reserve has adopted an easing bias,with all the risks of a euro appreciation that entails.We think this should also explain the more explicit focus on rate cuts.July easing bias,
21、September rate cut,QE contingent:Overall,the ECB seems to become increasingly conscious that the risks to its inflation objective are inconsistent with the Governing Councils relative complacence two weeks ago.The threshold for action now seems to be substantially lower,and to include rate cuts and
22、QE.We now expect a change in forward guidance could come already at the July meeting,when the ECB is likely to signal easing by re-inserting“or lower”into the sentence on policy rate expectations:ie,“The Governing Council expects the key ECB interest rates to remain at present or lower levels for an
23、 extended period of time.”We assume that this is followed on 12 September by a 10bp deposit rate cut.Given the ECBs relatively limited ammunition,we think it is more likely to deliver a small initial cut but leave the markets expecting more,rather than do a larger cut initially and risk being seen a
24、s having used up its ammunition.For QE net purchases to be reactivated would probably require a materialisation of contingencies,such as escalation in the USChina trade row,the introduction of US auto tariffs or a no deal Brexit.While none of those is our central case,the risks have increased and wi
25、th them the probability that QE is reactivated.What to watch next:Comments from other Governing Council members will be important to gauge the degree of consensus.The key risk is that President Draghi went well ahead of the Council consensus.That said,the comments were sufficiently forceful to sugge
26、st that he is confident in having support for further easing in the near term.President Donald Trumps comment that the prospect of further ECB stimulus made it unfairly easier for the eurozone to compete against the US suggests the risk of an external backlash.But once the Governing Council sees a c
27、ase for action,we do not think it will be swayed by such criticism.MARKET ECONOMICS 3 18/06/19 Marco Meijer,G10 Rates Strategist,Europe|Sam Lynton-Brown,Head of G10 FX Strategy,Europe|Ankit Gheedia CFA,EQD Strategist|BNP Paribas London Branch|Daniel Katzive,Head of FX Strategy North America|BNP Pari
28、bas Securities Corp.Market views Rates:Consider standing ready to fade todays move in 5y5y inflation swaps,as we do not expect the EUs inflation problems to be solved with further easing,with or without tiering.The sharp collapse in inflation swaps forced Mr Draghis hand,in our view,and todays drop
29、in rates across the curve and across bond markets suggests further easing is fully discounted by markets.A full 10bp cut is now priced by September and 20bp by December 2020.The biggest impact was in real yields and periphery markets:5y5y inflation swaps have spiked back above 1.2%.In our view,today
30、s reversal of the rise in real yields since the June ECB meeting is a small step towards restoring the ECBs credibility on inflation(see Figure 1).This Thursdays French linker supply(20 June)may be another test:are investors willing to accept historically-low real yields in expectation of a rebound
31、in inflation?We are a bit sceptical.If inflation expectations were to fall again with a rise in real yields,it would raise serious questions about ECB credibility.Besides rate cuts,Mr Draghi suggested the ECBs asset purchase programme could be restarted,stating that some of its limits were self-impo
32、sed.To create scope for much more government bond buying,either the capital key constraint or the 33%ISIN limit would have to be changed.While we cannot rule these out,we think a restart of the corporate sector purchase programme would be easier to implement.FX:We continue to expect EURUSD to move h
33、igher heading into H2,and we remain long EURUSD in our model portfolio(entry:1.1273,target:1.18,stop loss 1.1100).However,the most likely beneficiary of increasingly dovish G10 central bank signalling is the JPY,and this weeks dovish shift from the ECB reinforces our bearish view on the EURJPY cross
34、.We remain short EURJPY in our trade idea portfolio,via a 120 European Digital,expiring on 1-Aug-19.An ECB shift back into easing mode would be likely to add to headwinds facing the EUR.However,the FX implications of the ECB cutting the deposit rate and potentially engaging in further QE needs to be
35、 viewed in the global context of other G10 central banks also easing policy.We expect Tuesdays dovish ECB signal to be balanced by dovish innovations from the Fed on Wednesday.The ECB will struggle to move rate differentials meaningfully against the EUR,in our view,against a backdrop of Fed rate cut
36、s and dovish signals elsewhere in G10.We note that EUR rates markets already fully discount our new expectation for a 10bp rate cut in September,and markets also imply a further 10bp of easing by end-2020.This suggests EUR nominal front-end rates may not move down much further in the absence of more
37、 aggressive ECB rate cuts which,with falling US front-end yields,still implies significant EURUSD interest rate spread compression ahead.While EUR real rates fell on Tuesday,we think it would likely take a resumption of aggressive QE operations to move inflation expectations sufficiently to undermin
38、e the EUR from a real rate differential perspective.We also expect that US administration rhetoric will continue to aim to talk down the USD,particularly if the perception is that USD strength is being driven by extraordinarily dovish central bank policy outside the US.These complaints impact on the
39、 USD might build over time as global investors begin to attach more policy risk premium to USD exposure.Equities:Consider monetising SX7E skew against SX5E skew,and the BNP Paribas French bond-like basket(BNPPFBO1 index).Monetising SX7E skew against SX5E skew implements our view that SX7E is likely
40、to remain range bound in the short term.While tiering of rates could support the SX7E index in the short term,the prospect of even lower rates is likely to cap the sectors upside.SX7E skew remains cheap,suggesting investors are under-pricing this downside risk to the sector,in light of the already d
41、iscounted valuations.Todays developments also support our view that the BNP Paribas French bond-like basket could outperform(see Figure 3).Lower for longer rates in eurozone are likely to favour bond proxy defensive equities and low volatility strategies again,and we think investors will continue to
42、 shift out of cyclicals to defensives,with growth cyclicals in the eurozone remaining under pressure as a result.We expect the French economy to continue to outperform its European peers,and still think the market is under-pricing the French equity upside from corporate tax cuts.There could be posit
43、ive earnings revisions in the medium term.Fig.1:Real yield drops again,while inflation swap bounces back(%)Sources:Blomberg,Macrobond,BNP Paribas G10FX|EQUITY&DERIVATIVES|G10 INTEREST RATES 4 Marco Meijer,G10 Rates Strategist,Europe|Sam Lynton-Brown,Head of G10 FX Strategy,Europe|Ankit Gheedia CFA,E
44、QD Strategist|BNP Paribas London Branch|Daniel Katzive,Head of FX Strategy North America|BNP Paribas Securities Corp.18/06/19 Fig.2:Eurozone portfolio flows,Oct 2014 to Mar 2019 (EURtrn,accumulated sum)Fig.3:French bond-like equities outperforming on lower yields(equities rebased to 100,yields in%)E
45、CB,Macrobond,BNP Paribas Sources:Bloomberg,BNP Paribas G10FX|EQUITY&DERIVATIVES|G10 INTEREST RATES 5 LEGAL NOTICE 18/06/19 This document has been written by our Strategist and Economist teams within the BNP Paribas group of companies(collectively“BNPP”);it does not purport to be an exhaustive analys
46、is,and may be subject to conflicts of interest resulting from their interaction with sales and trading which could affect the objectivity of this report.This document is non-independent research for the purpose of the UK Financial Conduct Authority rules.For the purposes of the recast Markets in Fin
47、ancial Instruments Directive(2014/65/EU)(MiFID II),non-independent research constitutes a marketing communication.This document is not investment research for the purposes of MiFID II.It has not been prepared in accordance with legal requirements designed to provide the independence of investment re
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50、ity to ensure that you do not view or use the Research content in this document if your firm has not signed up to one of the BNPP Global Markets Research packages,except where your firm is out of scope of the MiFID II unbundling rules.STEER is a trade mark of BNPP.MARKETS 360 is a trade mark of BNP
