Bloomberg
Published May 05, 2020 06:21AM ET
Updated May 05, 2020 06:45AM ET
Markets Worry Ruling May Lead to Doubts About Other ECB Programs
(Bloomberg) -- The wrist slap given to the European Central Bank by the German constitutional court over its quantitative easing program had strategists pondering what this means for the market.
The euro slid, as did German and Italian bonds, on the prospect that the ECB may soon be prevented from exercising the full might of its asset-purchase program.
Germany’s top judges gave the ECB three months to fix its 2.7 trillion-euro ($2.95 trillion) asset purchase program after a seven-to-one ruling stating that some parts of the quantitative-easing program aren’t backed by European Union treaties.
“It’s my understanding that it doesn’t apply to PEPP, but if this proves a serious challenge to PSPP, the same argument could be made in courts against PEPP,” said Antoine Bouvet, a senior rates strategist at ING Groep (AS:INGA) NV. “This is not the sort of doubt you want to instill in the market.”
It prompted traders to add to bets the euro may fall further. The Pandemic Emergency Purchase Programme (PEPP) is a 750 billion euro scheme that runs out at the end of the year. The ECB started the public sector purchase programme in 2015, which buys assets on the secondary market.
“It looks like the euro-zone is shooting itself in the foot,” said Lee Hardman, a currency analyst at MUFG who sees the euro falling through March lows if this isn’t resolved in a market-friendly manner. “The risk of another euro-zone debt crisis would be significantly higher without ongoing support from the ECB. Those are the risks the market is weighing up in light of today’s decision.”
The currency fell as much as 0.7% to $1.0826. The yield on Italy’s 10-year bonds climbed as much as 11 basis points, widening its spread over bunds, a gauge of risk, to 241.
Here’s what strategists said:
Nomura International (Potentially big)
Danske Bank (GCC barks, not bites)
Commerzbank (Edge taken out of ‘whatever it takes’)
ING (Not the sort of doubt you want)
“It underscores the difficulty faced by the euro zone governments in their fight against Covid-19”
©2020 Bloomberg L.P.
Written By: Bloomberg
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