Daily Management Review

Now that Italy has Voted No, here’s What Mario Draghi and the ECB could do


12/05/2016




Now that Italy has Voted No, here’s What Mario Draghi and the ECB could do
In the wake of Italy's outright rejection of proposed constitutional reforms in Sunday night's referendum, expectations that the European Central Bank (ECB) will announce a six-month extension of its massive, trillion-euro bond-buying program on Thursday.
 
ECB is expected to announce an extension to its quantitative-easing (QE) program beyond the currently scheduled end date of March 2017, according to a Reuters poll last Thursday, prior to the vote, where 52 of 60 economists polled expressed this view.
 
The program is seen being extended by six months to September 2017 at the current pace of 80 billion euros ($85 billion) per month by the overwhelming majority of those polled among those anticipating an extension. A reduction in the pace of purchases by either 10 billion euros or 20 billion euros per month is expected to accompany the prolonged timing, said around a quarter of respondents.
 
The ECB lent reassurance to investors that the central bank was on guard to act should the referendum outcome precipitate a renewed burst of market jitters by stepping in to purchase Italian debt in the case of extreme volatility in the country's bond yields, as indicated by a speech by ECB President Mario Draghi last Wednesday -- alongside unsubstantiated media reports.
 
A key factor in ensuring the 10-year Italian government bond yield rose by only a measured amount to just over 200 basis points in early Monday morning trade, rather than to the blowout levels feared by some observers is seen to be the combination of the widely held belief that the ECB stands ready to use its toolkit to offset any potentially exaggerated market reactions and a No vote being largely priced in by markets ahead of the weekend.
 
But it is necessary to weigh economic realities with the ECB's incentive to press on with additional easing to help stabilize financial markets. Since the release of its September forecasts and reasonably buoyant surveys heading into the fourth quarter, the overall euro zone economy is developing largely as expected.
 
The ECB faces conflicting considerations, while the consensus overwhelmingly anticipates further easing, according to various analysts.
 
"The favourable economic outlook limits the case for additional ECB easing. On the other hand,the still-uninspiring development of core inflation and high policy uncertainty gives the ECB no grounds for sounding hawkish", the dilemma was thus noted by a research note from the team at Société Générale last week.
 
Meantime, analysts at Mizuho see the risk of limiting supportive action as too high.
 
"The asymmetry is bluntly thus: either the ECB extends QE or the probability of a euro market crisis rises significantly. With 2017 being high on political event risk, we think the latter would be actively positioned for by investors if QE was to be prematurely pared back," according to a research note from the team from Friday.
 
Dropping to nearly 1.05 to the U.S. dollar before recovering at market open (9am CET) to head back up to levels around its previous close, the eurozone's currency tested lows last seen in March 2015.
 
However, investors will need to wait a while longer before seeing the full implications of the Italian referendum outcome, according to Richard Cochinos, head of european G10FX strategy at Citi.
 
"Over the medium term it does create an environment where investors are just going to be uncertain and that uncertainty is going to limit their investment," he said.
 
"It'll limit the investment in European equities, in European fixed income and ultimately that's what becomes the euro's negative driver," he warned.
 
(Source:www.cnbc.com) 






Science & Technology

Scientists Discover Largest Ever Under Water Volcanic Eruption Near New Zealand

Bitcoin craze increased load on the power grid to the maximum

PC And Server Performance Slows Down Due To Security Patches For Chip Flaws, Says Microsoft

Cybersecurity Firm Claims Cryptocurrency Monero Might Be Getting Funneled To North Korea University

The Way We Travel Will Be Changed by The Colorless, Odorless Gas - Hydrogen

EU's Big Change In Data Protection Rules Makes Businesses To Get Ready For It

Artificial Intelligence Helps NASA Find An 8th Planet In Orbit Of A Distant Star

Australian Research Success Could Mean Shatterproof Cell Phones Could Soon Be A Realityv

Top ten hi-tech events of the year

Tesla Considering Designing And Developing AI Chips On Its Own To Support Its Auto-Pilot Project

World Politics

World & Politics

2017 Was Second Warmest Year Since Records Were Kept And It Had No El Nino Effect

France and Germany want to reform the eurozone

Take and go away: new approach to refugees in Europe

Both The Korean Countries Will Come Together In Olympic Talks

Parties of Germany agreed on the migrants problem

Munich Re: Natural disasters caused record damage in 2017

High-Level Talks To Be Held Between North And South Korea In Over Two Years

Sexually Abusing Children Interests An Estimated 20,000 British Men, Shows Police Monitoring Of Chat Sites