Thursday ECB decision, July Preview

Today we stayed on the sidelines, a specatator to robust asset trading (equities/corp bonds/periph sovs all catching a bid) and some abnormal correlations... Read on.



The ECB rate decision on Thursday has clearly dominated the days action with EURUSD down around 80pips and equities up around 1% generically - a strange twist given that these markets tend to trade in tandem. A cut in rates is therefore priced in: risk positive, currency negative. We expect today's correlation 'regime' to break down tomorrow as markets recalibrate.


Silver has also rallied against the EURUSD - abnormal as a stronger USD tends to dampen support for dollar assets. A similar explanation to the above persists here: a cut in rates leads to cheap money that precious metals will inveitably soak up to some extent.

July Preview:

• 1 July: Cyprus becomes EU President. Cyprus will resume the six-month rotating presidency of the EU.
• 4 July: Merkel to meet Monti in Rome.
• 5 July: ECB Governing Council meeting, followed by interest rate announcement and news conference. We expect a 25bp policy interest rate cut. The ECB may be reluctant to cut the deposit rate to zero. With easier collateral rules already announced on 22 June and the next Bank Lending Survey not due until 2 July, the policy moves on 5 July could be restricted to the cut in interest rates.
• 5 July: Spain auction. Bonds.
• 9-10 July: Eurogroup/ECOFIN finance ministers meeting. 9 July is to be the start date for ESM, successor to EFSF. This is also the date on which the Eurogroup is to formally approve the MoU on Spanish bank recapitalisation aid. Additionally, we might get more clarity on the interest rate charge that will come with the capital injection and on the duration of the loan.
• 10 July: Greece auction. Bills.
• 12 July: Italy auction. Bills.
• 13 July: Italy auction. Bonds.
• 17 July: Spain auction. Bills.
• 17 July: Greece auction. Bills.
• 19 July: Spain auction. Bonds.
• 24 July: Spain auction. Bills.
• 25 July: ECB lending survey. The ECB is due to publish its third lending survey of the year on Wednesday 25 July. The survey could provide the ECB with a key piece of evidence to justify additional 3Y LTROs — if lending standards tighten again, another liquidity push may be necessary to avert a harsher credit crunch. The ECB plans to publish one more lending survey this year, on 31 October.
• 26 July: Italy auction. Bonds.
• 27 July: Italy auction. Bills.
• 30 July: Italy auction. Bonds.