Positions in Europe: Short Russia (RSX)
Today’s Q&A session revealed that there was “wide discussion [about a rate cut] but the prevailing consensus was to leave rates unchanged”, leaving the interest rate on the main refinancing operations unchanged at 0.75% along with the interest rates on the marginal lending facility and the deposit facility at 1.50% and 0.00%, respectively.
The real call-out of the meeting is the ECB staff’s projections downward revision for Eurozone GDP. Below we show the last three estimates, with the trend decidedly Down, Down, Down. This move however didn’t come as a great surprise as we noted it in our November ECB report. We’d call to your attention specifically 2013, which shows a dramatic revision to the top end range.
2012 GDP growth
DEC: -0.6% and -0.4% SEPT: -0.6% and -0.2% JUN: -0.5% and 0.3%
2013 GDP growth
DEC: -0.9% and 0.3% for 2013 SEPT: -0.4% and 1.4% JUN: 0.0% and 2.0%
Beyond the inability of the ECB to accurately forecast, what was telling about today’s conference was that Draghi went so far as to paint an optimistic tone (in spite of falling economic projections) by citing business confidence surveys in Germany, France, and Italy that ticked up in the most recent reading. Citing merely this data in a sea of negative to depressed data is an obvious stretch.
The Q&A was largely filled with a tight-lipped Draghi for any comment on Spain or Italy tapping the OMT, with him simply reiterating that it’s up to the individual Eurozone governments to request a bailout and that the Bank stands ready to use OMTs (of course under conditional requirements).
However, one question on a Banking Union is worth highlighting. To paraphrase, it went: “Given that the ECB’s stance on a Banking Union remains that it should include all 6,000 banks whereas the Germans believe it should only include its largest banks, if it is decided that a Banking Union does not include all 6K does it make sense to have it at all?”. To this Draghi dodged the answer and only said that a Banking Union needs a strong supervisor where the ECB doesn’t have reputational risk.
This is a clear signal to us that the ECB and Germans (in particular) will be at loggerheads over the formation of a Banking Union, and extend market consternation as Eurocrats push out the formation of a Banking and Fiscal Union. We believe the inability to find a solution should strengthen the lid on the EUR/USD, with our intermediate term TREND line of resistance in the sand firmly at $1.31.
While we will not argue that we have seen improvement in European equity and bonds markets since this summer, especially following Draghi’s September OMT announcement, we contend that despite all the market intervention, prices will (in time) reflect the underlying health (or lack thereof) of the region. Here we believe Europe’s path to growth will be constrained and prolonged by Eurocrats. Weak credit lines to households and corporations are one piece of evidence of a very clogged environment that should hamper real growth.
You can find Draghi’s Introductory Statements here.