(09 APRIL 2019)DAILY MARKET BRIEF 1:ECB negative rates in focus
9 April 2019, 14:34
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In light of news that a major French Bank will layoff 1,600 employees, the topic of ECB negative interest rates effect on banks’ balance sheets has become hot again. Discussion on negative rates will be the focal point of this week’s ECB meeting. In March, the ECB's dovish communication and members worry over the negative impact of low yields hit banking sector stocks hard. While it’s hard to pinpoint why these layoffs are necessary, reduced banks’ interest margins and profitable due to low rates are clearly not helping. Possible solutions to reduce the impact including ECB reserves tiers are finding a divided committee. Moreover, it is unlikely that a solution will be provided at this week’s ECB policy meeting. In March's press conference Draghi stated, “possible measures that can preserve the favorable implications of negative rates for the economy, while mitigating the side effects.” Our focus will be on President Draghi’s view on tiered reserves, which would be a mixed, slight positive bias for euro area financial markets. On the one hand, tiered reserves would indicate higher profitably for banks but on the other, suggest negative rates for longer. Following the March meeting, were the ECB’s introduced TLTRO III and the announcement of modifications in forward guidance, we do not anticipate any new policy measures. The ECB provided a dovish bias via a reduction in economic and inflation forecasts indicating that the possibility of a further dovish surprise is unlikely. Rate markets have already begun pricing in an ECB interest rate cut. Additional feeling downside risk has increase will quicken the flattening of the EGB yield curve and weaken EUR further. EURUSD recovery was weak and would need a break above 1.1289 to extend the bullish tone.
By Peter Rosenstreich
