What do markets expect from today’s ECB meeting?

Mario-Draghi-700x450.jpgMario Draghi’s credibility will be “seriously damaged” if the ECB does not extend monetary easing at the meeting today, say commentators.

Market expectations are high of the ECB extending quantitative easing or further adjusting monetary policy.

Ahead of the meeting Draghi said he wanted the “full range of policy options available for implementation” adding that “it will be necessary to review and possibly reconsider out monetary policy stance at our next meeting”.

However, there are concerns of Draghi disappointing the markets, after he gave strong hints of an expansion to monetary policy ahead of the December meeting and failed to deliver.

Jeremy Beckwith, director of manager research at Morningstar UK, says: “Mario Draghi’s credibility will be seriously damaged if the ECB does not opt for further monetary easing this week.

“The last time he gave strong hints that action was imminent was ahead of December’s meeting, when he was unable to persuade the ECB to go along with him.”

Eugene Philalithis, portfolio manager of the Fidelity Multi Asset Income Fund, says: “The risk is that the ECB disappoint markets, but having already made this mistake in December, expectation management has been more carefully managed in the run-up to this month’s important meeting.”

But the industry is divided on what it expects the ECB to do.

Research compiled by M&G Investments shows that RBS is expecting a 20 basis points cut to the deposit rate, while most others are expecting a cut of just 10 basis points.

The majority are expecting an expansion to quantitative easing, with Credit Suisse and Morgan Stanley expecting the largest boost at €20bn, while Citi expects a €15bn increase.

However, Stefan Isaacs, deputy head of retail fixed interest at M&G, says more than monetary expansion is needed to boost the eurozone.

“The reality is that increased productivity and greater innovation is much needed to drive the eurozone. Antiquated bankruptcy regimes need to be radically reformed, red tape needs to be removed and the banking system needs to own up to further loan losses that it has yet to provision for,” he says.

“Absent further structural change I’m convinced the eurozone will labour under a cloak of lower potential growth and struggle to encourage investment given the need to earn an attractive rate of return on capital.”

Ahead of the annoucement Rory McPherson, head of investment management at Psigma, says he has been trimming equities as they look “over bought” ahead of the ECB meeting, and the Japan, UK and US announcements next week.

However, he sees opportunity in European banks, which have been hit recently. “Lots of the peripheral banks have been battered and trade on very cheap multiples. We believe a package that promotes money flow and lending will be good news for these holdings,” he adds.

However, if the ECB follows Japan’s move to negative rates and introduces no tiering to it, banks will be hit harder, says McPherson.

“[A package] that crimps lending, so negative rates with no tiering, will clearly be bad news as has been the case in Japan where you’ve seen banks buying up government bonds as holding money on deposit invites a charge.”

M&G Bond vigilantes