Concerns about ECB underdelivering keeps the pressure on bunds. A wide range of possible outcomes from Thursday’s meeting slants towards near-term profit taking of very rich valuations.
ECB speakers have been trying to dial back the extreme easing expectations priced by markets to give Draghi some room to surprise, but the hurdle still remains high
Policy makers will need to be aggressive on rates and keep the future path suppressed otherwise a modest depo rate cut risks seeing EUR rates continue to sell off in the near-term given the impact of the lower bound on the curve
From a macro valuation perspective there is room to sell off (with fair value of -0.43%)
Setting the path to go deeply negative on rates and lifting the buying limits on any QE announcement to make it scalable is key to seeing bunds extend the rally in the short term; however, positioning for a disappointment via options is still worth looking at given the difficulty for Draghi to engineer a dovish surprise
The ECB has quite a dilemma in front of it. The short end of the yield curve is sporting negative yields for just about all sovereigns. However, when we look at the shape of the yield curve for individual countries, compared to the Eurozone as a whole, we get two very different pictures.Click HERE to subscribe to Fuller Treacy Money Back to top