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ECB Meeting Tomorrow

02/08/2012

Global central banks continue their presence in capital markets, a consistent condition since the fall of 2008. This current extended period of central bank participation is historic in both its global coordination and certainly duration.
 
After late January’s dovish U.S. FOMC meeting, the attention now turns to Europe where the European Central Bank (ECB) and Bank of England (BOE) will meet. Also, although the Bank of Japan (BOJ) does not formally meet, I caution investors to be aware of my expectation that another round of BOJ currency intervention is nearing as the yen continues to appreciate and hamstring the earnings power for Japanese corporations.
 
Expectations for the BOE meeting on Thursday, February 9
 
•   Currently, the BOE has an announced rate of .50%. I expect that will remain unchanged. However, I would expect, as does most of the Street, an expansion BOE asset purchase target from 275 billion pounds to 325 billion pounds.  There are some calls for another 25 billion pounds to 350 billion. The U.K. economy contracted in the fourth quarter and its domestic recovery from 2008 is behind the U.S.  Consumer debt remains high and housing is in worse condition than the U.S.  The British pound has risen to its 200-day moving average. Further appreciation in the pound would be favorable for global capital markets.
 
Expectations for the ECB meeting, also on February 9
 
•   I expect nothing to be announced in terms of a change to rate policy or additional easing measures. Government bond auctions year to date have been executed extremely well, and economic conditions appear to be modestly improving. The Long Term Refinancing Operation (LTRO) conducted in December has stabilized conditions in Europe and fostered global equity market appreciation year to date.  Another round of the LTRO will be conducted at the end of February. I expect ECB President Mario Draghi NOT to address whether additional rounds of LTRO will be offered beyond February. If he does announce further LTROs, the risk is that banks “back-off” for the February round and participation is not as robust. “Robust” bank participation would once again provide a favorable shot of confidence to global markets. Completely ruling out any further LTROs would be a disaster, and investors should not expect that to occur. The value of the euro currency has stabilized but remains well below its 200-day moving average. Most important is not further euro appreciation but rather stabilization and prevention of a euro free fall, which would negatively impact the earnings power of U.S. companies. I expect the suspicion that the ECB would conduct further LTROs if conditions worsen will be enough to keep the euro stable above its January 13 low of 1.2624.       
 
 
British Pound, February 8, 2011 to February 8, 2012

Source: Bloomberg

 
Euro Spot Currency, February 8, 2011 to February 8, 2012

Source: Bloomberg

 

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