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Takeaway: No change in interest rates as the ECB monitors sovereign yields and Eurocrats debate ongoing policy moves.

Positions in Europe: Long German Bonds (BUNL)

The ECB meets tomorrow. Our call is that there will be no change to its main interest rates and we will get no material update on when the Outright Monetary Transactions (OMTs) could be activated to buy sovereign bonds.

Our rate position is in agreement with consensus -- 48 of 54 economists polled by Bloomberg expect no change in the main interest rate.  On OMTs buying, we expect Draghi to continue to be tight lipped, mostly given the political climate and that while Spanish and Italian yields are elevated (the 10YR is currently at 5.88% for Spain and 5.08% for Italy) there below the critical threshold levels around 7.30%.

On the political climate we think there’s no reason for the ECB to act as the market is still sifting through such issues as:

  • If and when Spain will seek a sovereign bailout
  • The extent to which the ESM can directly recapitalize troubled banks, and
  • The terms around setting up a banking union

These will be some of the topics discussed when the Eurogroup holds its next meeting in Luxembourg on October 8-9.

ECB on Hold Tomorrow - aaa. rates

Keith covered our Real-time position in FXE (EUR/USD) on 10/1 at $128.53 with the cross at our immediate term TRADE oversold level. The EUR/USD continues to fail at its $1.31 TAIL line of resistance.

ECB on Hold Tomorrow - aaa. eur

Matthew Hedrick

Senior Analyst