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 there will be no material update on when the Outright Monetary Transactions (OMTs) could be activated to buy sovereign bonds.
Our interest rate position is in agreement with consensus -- 46 of 47 economists polled by Bloomberg expect no change in the main interest rate. We think the ECB is holding its bullets even as inflation remains sticky and above the 2% target (currently at 2.5% in OCT Y/Y).
The bank is also wrestling with an uncertain political climate focused on:
- The extent to which the ESM can directly recapitalize troubled banks, and
- How to set up banking and fiscal union
And the Bank is also aware of weak loan results, as displayed in the first chart below, and weakness in the broader economy, as witnessed in the Services and Manufacturing PMIs below the 50 line indicating contraction. That said, we do not expect these figures to influence a rate cut tomorrow.
On OMTs buying, we expect Draghi to continue to be tight lipped, mostly given the political climate and the moderation in Spanish and Italian sovereign yields (currently the 10YR is at 5.69% for Spain and 4.91% for Italy).
The Eurogroup holds its next meeting on November 12th; the hot topic will likely be Greece. The Greek government announced that it will have a decision on a €13.5B package of spending cuts, tax increases and structural reforms ahead of the meeting, on November 11th, which is pursuant to a €31.5B aid tranche intended for delivery on November 27th. Both a divided Greek Parliament and strong populace resistance to austerity suggest challenges to passage, as an ultimate decision has been promised and delayed for weeks.
We do not have a Real-time position in the EUR/USD (FXE) but our immediate term TRADE levels are $1.27 – 1.29 with intermediate TREND resistance at $1.31.