Headlines
• ECB confirms its target for asset buying plans.
• Further rouble weakness.
• Electrolux (ST:ELUXa) downgraded by S&P.
Market commentary
European credit indices have seen a gradual tightening this week. In the latter part of the week, the credit market has found renewed support following the ECB’s confirmation on Thursday that it aims to carry out its asset buying plan as previously communicated. While earlier in the week the media reported rising tension among the members of the ECB board and that some national central bank governors were willing to challenge ECB president Mario Draghi, these reports proved to be exaggerated, at least for the time being.
In the ECB’s statement, the central bank has stipulated a target of growing its balance sheet up to the levels seen in 2012, i.e. indicating balance sheet growth of around EUR1,000bn. This target was said to be unanimous. Mario Draghi also claimed that the ECB’s council was unanimous in its willingness to use further unconventional tools, including quantitative easing, if necessary. The ECB’s staff are now said to be working on the potential additional measures that could be applied in addition to the already-announced purchases of covered bonds and asset-backed securities. So far, the ECB has bought only some EUR5bn of covered bonds, while acquisitions of asset-backed securities should start later this month.
We regard the ECB’s continued commitment to an overall asset purchasing plan of EUR1,000bn as broadly supportive for European credit spreads. As we do not regard the European covered bond and asset-backed markets as large enough for the ECB to be able to reach this volume target, European corporate bonds would be a natural next step for the ECB to consider purchasing. A rough estimate suggests that there is a total of EUR930bn of outstanding rated investment grade non-financial bonds (of which EUR620bn relates to euro area corporates). Assuming the ECB could buy up to a maximum of 40% of the outstanding volumes (an aggressive assumption), this would result in a potential purchase volume of roughly EUR300bn.
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