ECB: The calm before the storm - HSBC

The ECB focus now moves to the 26 October meeting, just days after the debt ceiling crunch was delayed to December and near term, markets will focus on primary, geopolitics, hurricane season and the 20 Sep FOMC, according to analysts at HSBC.

Key Quotes

“Delay in QE decisions until (probably) October … 

The outcome of latest ECB meeting – and the delay in the debt ceiling until (probably) December – pushes two key questions into Q4. Neither has gone away (our economists still expect a reduction to EUR40bn to be announced on 26 October, and the eventual end of APP in late 2018) but, on their own, postponement allows for short-term risk seeking markets. Bull flattening in periphery and gentle tightening in iTraxx spreads after the press conference sets the tone, helping CDS performance ahead of the September roll. Being less underweight in the short term (but still underweight subordinated insurance given ongoing potential left-field risks from geopolitics and the weather) is the strategy that makes sense to us. We had already become a notch less bearish on EUR IG after the widening in August, having moved up our official monthly recommendation from bearish to mildly bearish. 

Near term, the Fed, hurricanes, geopolitics and potentially heavy performance in primary markets leaves questions that offset the beneficial impact of the roll.”

“Beware cyclically expensive valuations left-field risk 

Unfortunately, more strategic investors are still left with cyclically tight spreads and no clarity yet from policymakers on the remaining key questions of 2017. In any case, it is hard to be strategically bullish EUR credit unless you have both confidence on geopolitics (which seems brave) and the liquidity to cut risk significantly in the required size later in the year. The risks are still for wider spreads longer term.”   

“Positive growth surprises versus still subdued inflation 

The ECB forecast 2.2% real GDP in 2017. The last time the ECB forecast growth above 2% was September 2007. This helps to keep default rates low, underpinning our constructive view on the very front end of EUR HY.”