Draghi’s Next Move

The ECB chief, Mario Draghi, has all but stated that the Governing Council will take further measures to help inflation rise to their target of close to but under 2%.

The debate has since moved to what those “measures” will be. A further cut by 10 bps in the repo rate is fully priced in the markets and Draghi himself has implied this as being the case in a conference organised by Deutsche Bundesbank on the 4th February.

After a disappointing set of stimulus in December, the ECB is now expected to expand its QE programme, by an estimated 20–30 bn daily. Given the global outlook, the low oil prices, the negative rate that the Bank of Japan has surprisingly adopted this year, the Swiss negative interest rate, Draghi does seem forced by the market to at least match their expectations. A recent drop in prices across all the major stock markets, driven mostly by not matching profit expectations of Oil & Tech companies and the imminent tech bubble burst, the bonds do need to start looking “quite unattractive” for investors to shift away from them.

The expansion/extension of ECB’s QE programme needs to take into account the lack of alternative “safe assets”, as the two biggest sectors (tech & energy) are the places people are pulling their money from.

An alternative could be “wait and see”…

Trading Strategy: Judging by the statements that the Governing Council members have made, including Draghi himself, my personal view is that the easing programme will be left unchanged at the next meeting, also a probability of more than the current 11% priced in the markets for a 20 bps cut is needed. I believe an increase in the euro is to be expected after the meeting, as the statement will not match the expectations. Also gold looks good these days…