Global Daily – ECB to stabilise Italian bond market?

by: Nick Kounis , Maritza Cabezas

Report that ECB is ready to step up Italian bond purchases – Reuters reported that the ECB is ready to temporarily step up purchases of Italian government bonds if the outcome of the referendum on Sunday leads to a surge in the country’s bond yields. It cites four unidentified ECB officials who also noted that the move would not necessarily need Governing Council approval. The ECB already deviates from the capital key to make substitute purchases to make up for not being able to make targets for countries where holdings have reached the issuer limit or for other technical reasons. For instance, in October, the ECB exceeded the capital key allocation for Germany (by more than EUR 600m) and France and Italy (both by around EUR 450m) among others, while buying less Portuguese bonds. So the ECB could deviate operationally and allow the central bank of Italy to buy even more Italian bonds to try and stabilise that market, even though this is not the goal of the QE programme. However, this would be a relatively temporary phenomenon because it cannot sharply and persistently deviate from the capital key under the current rules of the programme. Indeed, the Reuters report quotes the officials saying such a policy would be limited to ‘days or weeks to counter any immediate volatility’. If Italy needed long-term support, it would need to officially ask for help according to the report. This would presumably be via the OMT, though that would require Italy entering a reform programme, which would be politically very challenging. The Reuters report supported Italian bonds, reversing some of the sell-off in recent weeks. We are publishing a Euro Watch note today on ‘Italy referendum ramifications’, assessing various scenarios and the market implications, so please look out for that. (Nick Kounis)


Global-Daily-Insight-30-November-2016.pdf (46 KB)


US Macro: Consumers look ready to support recovery – The second estimate of Q3 GDP growth showed that the US economy grew at a faster pace than initially reported. Q3 GDP growth grew by 3.2% compared to 2.9% in the previous reading and higher than the 1.4% in Q2. Overall, the big picture was that consumption growth and export growth were revised higher. Although consumption remains the main driver of growth (contribution of 1.9%), it has fallen compared to the previous quarter (2.9%). At the same time, the contribution of net export growth was revised higher to 0.9% and is much stronger than the previous quarter (0.2%). The revisions made to the contributions of fixed investment showed that the investment in structures was stronger in Q3. Investment in structures grew by 10% after having been a drag for quite some time, as a result of the depressed investments in the energy sector. Meanwhile, the US election seems to have helped to sharply lift the consumer mood. The Conference Board’s Consumer Confidence index jumped to 107.1 in November from 100.8 the previous month. This is a sign that we are set to see stronger consumer spending in the coming quarters. We expect a solid labour market and eventual income tax cuts by the next administration to support robust consumption growth. (Maritza Cabezas)