Flash Notes

As expected, the European Central Bank (ECB) decided to keep interest rates unchanged following its meeting on Thursday. ECBPresident Mario Draghi also refrained from commenting on the prospect of either extending or tapering the current quantitative easing(QE) program.

    We do not believe that Draghi’s refusal to pre-commit in terms of extending QE and excluding a tapering should be read as theGoverning Council thinking about a gradual termination of QE post-March-2017. In fact, when asked, Draghi stated that an abruptending to bond purchases is unlikely. And whilst he said bond scarcity is not a problem right now, the issue took much of the governingcouncil’s discussion.

    This leaves us more convinced that the ECB will announce an extension of the QE programme at the 8 December meeting, wherethe ECB will also publish new economic forecasts as well as analysis by Eurosystem committees on measures to ensure the smoothimplementation of the Asset Purchase Program (APP). This will most likely be at the full EUR80bn/month current pace for another sixto nine months. To credibly extend QE, the announcement will likely come with some technical adjustments to address the shortagesof eligible bonds, at least increasing issuer/issue limits. We estimate that, under current market conditions, raising the ISIN limit from33% to 50% and applying the deposit-rate restriction to a portfolio of bonds rather than to individual bonds would free a sufficientamount of German paper to make this extension possible.

    After a spike to 1.1039, EUR/USD took out the 1.0950-support to see lows of 1.0916 but failed to test the June-Brexit-low of 1.0913.

    That said, the absence of clearer guidance will leave markets susceptible to the rumor mill, risking some market volatility in the run-upto the December meeting. In the meantime, the focus will return to tracking growth prospects across the Eurozone economy as wellas earnings and particularly reports from key European banks.