Thursday, January 22, 2015

Early Commentary On the European Central Bank Announcement

From The Big Picture:

Finally the details . . .
The ECB said the combined monthly purchases which includes ABS and covered bonds and now include sovereign and agency bonds will total 60b euros per month and will continue to do so “until we see sustained inflation improvement.” The ratio will be based on the capital key where about half is made up of Germany, France, Italy and Spain. The ECB will coordinate the purchases but will be implemented decentrally which means at the national level. European institution paper (such as EFSF paper will be subject to loss sharing but national central bank purchases of other sovereign debt will not be subject to loss sharing which appeases the Germans). They also lowered the rate at which the TLTRO will be lent at to .05% from .15%.

Bottom line, as I doubt even the ECB believes that this news will directly increase bank lending, it is likely all about further weakening the euro. In trying to gauge what has been priced into markets, the euro is the main thing we should be watching which is down slightly after being up slightly. Second to that is the European sovereign bond market where the action in German and French bonds (making up 1/3 of the capital key) seems to have priced the news in as the 10 yr yields in both are little changed.  On the flip side, the bonds of Italy and Spain are higher with yields lower....MORE
And from FT Alphaville:

Draghi and the risk-sharers
The ECB just announced it will increase monthly buying of assets by €60 bn which will continue until September 2016, and will do so on a risk-sharing basis on 20 per cent of the assets purchased rather than on an entirely pooled based. More details: Everywhere.

For now, here’s the first comment in our inbox from Marc Ostwald at ADM Investor Services, who says the risk sharing component is limited:...