Investors Have Very Low Expectations of ECB MOT

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Investors Have Very Low Expectations of ECB MOT

Investors Have Very Low Expectations of ECB MOT



All eyes will be on the ECB today, but we have already seen leaks from the central bank that have pretty much told us what to expect.

The leaks suggest that the ECB will carry out unlimited bond purchases for the longest maturities they claim to be within their mandate, which is 3 years.

Unfortunately for them, however, apart from a rally in the euro, the reaction in risk assets has been pretty muted thus far. Online spread trading investors remain unconvinced.

Perhaps the finer detail, due to be released over lunchtime, will add more meat to the bones. In particular, the market will be interested to see if Mario Draghi is specific in mentioning any yield or spread targets.

At the end of last year, the Swiss central bank said that they would defend the SFr 1.2000 level for the EUR/CHF pair at all costs. Since then, the rate has not deviated and investors will be looking for the ECB to show similar resolve in capping the borrowing costs of the PIIGS.

The good news about today's expected announcement is that we will have yet another acronym to talk about in the form of 'MOT'. And if ever there was an economic area that needed an MOT check up, it's the Eurozone.

The Monetary Outright Transactions are designed to urgently rein in peripheral states' borrowing costs and, for now, the markets are just biding their time ahead of hearing the details of the plan.

Unlike the SMP before it, which was a rushed initiative back in May 2010 to deal directly with Greece, serious thought has gone into the MOT. This includes, to a relative extent, an important buy-in from Germany.

The real issue is that it still isn't going to be the big bazooka that everyone wants to see. Like most other central banks, the ECB still isn't the lender of last resort, so European banks don't have the guarantee that the ECB will step in if required.

Maybe another LTRO will be announced, or at least given a date in time for it to happen. However, given the current reaction from the equity markets, investors are going into today's meeting with very low expectations.

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By Simon Denham, 6 September 2012


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