DE30: More scepticism about ECB’s monetary stimulus

Summary:

• Equity markets in Europe start the day with notable increases
• ECB’s Villeroy express doubts over a bond buying resumption
• DAX (DE30) takes another attempt to break above its crucial resistance line

Although everybody in the financial markets is zooming in on Brexit developments, one cannot forget about other events which may be equally important. Among these events the European Central Bank meeting next week is undoubtedly on top as it may exert a substantial impact on European bonds and equities. However, while expectations before this event seem to be lofty, there is still no consensus among Governing Council members as for what to do when they meet next week. In the light of these uncertainties we would like to focus on a speech given by ECB’s Villeroy yesterday. Before we move to this topic, let us present the state of play in the DE30 chart.

As one may see, the DE30 is striving to break above its key resistance line with another crucial technical (the SMA 100) level lying not too far away. Moreover, the price will have to deal with the 23.6% retracement of the latest leg higher since the start of this year. Thus, bulls do not seem to have a plain road ahead. Source: xStation5

Getting back to our prime topic for today, let us begin with a short reminder that some ECB members including Weidmann, Knot and Lautenschlaeger have already voiced their scepticism when it comes to a re-launch of quantitative easing as soon as next week. On tuesday, a French ECB member Francois Villeroy de Galhau joined a hawkish chorus saying that the ECB does not have to use all the instruments in its toolbox at the same time. In short, it would mean - in our view  - that he simply ruled out a possibility when the ECB cuts a deposit rate and restarts its bond buying programme (with possible strengthening of forward guidance as well). On the other hand, he did not rule out any action next week as he acknowledged that restarting quantitative easing is “a question to be discussed.” Villeroy also blamed the elevated stock of assets, being in the hands of the ECB, for widespread bond yields flattening. He added that a rate cut might be needed so as to keep short-term yields from rising. Therefore, some policymakers seem to opt for a rate reduction rather than resorting to a bomb-like option in the form of the QE resumption. However, by not pursuing market expectations the ECB would risk confidence undermining which appears to be the last thing Mario Draghi wants being in the final stretch of his term in office. That is why we think the ECB is likely to cut its deposit rate by 10-20 basis points along with relaunching its QE programme, but this decision may only come with a number of dissenters which ought to soothe a negative impact on the euro and a positive one on stocks and bonds. 

Looking at the DE30 breakdown presented below one may notice that all stocks being listed there are on the rise this morning. Wirecard is leading the gains following a report that the company is expanding its partnership with Mizuho Bank. The strengthened collaboration is to include a significant geographic extension, working on new payout products and joint digital payment solutions.

All stocks listed in the DE30 are on the rise after the first hour of Wednesday’s trading. Source: Bloomberg