Five Things To Know Ahead Of The ECB Meeting

The ECB meeting or more precisely, the press conference is the main event of the day, and possibly of the week and month.  ECB President Draghi and Vice President Constancio have expressed heightened urgency to boost inflation as fast as possible. This has been countered by others arguing to let the other new initiatives, including the second TLTRO (next week) a chance to work. Moreover, Bundesbank’s Weidmann has argued that the drop in oil prices will also provide stimulus that had not been counted on previously.  

However, there are five other developments to note today.  First is the price action. The major currencies are in narrow trading ranges against the dollar today.  The euro has been confined to 15 bp on either side of $1.2310. The dollar has been confined to less than a quarter of a yen below JPY120. Sterling has enjoyed a somewhat wider range of 40 pips, but is trading within yesterday’s ranges. It has remained within the ranges seen Monday over the last three sessions. 

Although there are some who expect Draghi to give clear commitment that sovereign bonds will be purchased next year or sooner, given the rally in European bonds and stocks and the decline in the euro, there seems to be recognition of the risk of disappointment.  Many want to sell into the euro bounce.  

Second, although the Hong Kong-Shanghai equity link is off to a rather slow start, Chinese stocks on a tear. The Shanghai Composite is up 4.3% today and 10.25% over the past five sessions.  It has gone parabolic, rallying 18.6% over the past eleven sessions. It now sits at fresh three-year highs. Among the key drivers is the anticipation of easier monetary policy. Not only did the PBOC unexpectedly deliver it first interest rate cut in two years, but more action is expected.  

The fact that the PBOC failed to drain liquidity for the past three sessions has encouraged speculation of a cut in reserve requirements as early as tomorrow.  In addition, reports suggest that officials will soon allow wealth management products to trade on the bond and stock markets, disintermediating the trust banks, and further squeezing shadow banking activity.