SSA Market: The elephant in the room - Rabobank

In view of the analysts at Rabobank, their ECB watcher Elwin de Groot anticipates the ECB will look to signal a gradual exit (tapering) from QE by the middle of this year.

Key Quotes

“Late Friday afternoon a report hit the wires suggesting that ECB policymakers had discussed whether they could potentially raise rates (the -0.40% deposit rate) before QE comes to an end. Though the timeline nor the specific measures were discussed according to ‘anonymous ECB sources’, Governing Council (GC) members reportedly exchanged views on possible ways of communicating and sequencing an exit from unconventional policy.”

“Our ECB watcher Elwin de Groot anticipates the ECB will look to signal a gradual exit (tapering) from QE by the middle of this year. To us, the expectation that the GC will look to adjust its language and verbally prepare the market for tapering is in itself a tightening of policy, thus limiting the rationale of adjusting the depo rate whilst the PSPP remains in place (albeit at a reduced monthly amount of EUR 60bn as of April 1).  If anything, we would see such a move as counterintuitive from the perspective of the ECB looking to manage a smooth exit from its QE.” 

“Trader comments

• For European fixed income markets the elephant in the room remains tapering. Like an addict the market is fearful of the consequences when its fix is withheld. Perhaps counterintuitively it could be beneficial for the SSA sector or certainly for those issuers associated with the core markets. We would even go so far as to suggest that over the last few days & weeks we have been granted a glimpse of what might happen. 
• Our research team predicts, with good reason, that there will be a flight to quality out of weaker sovereign credits which have for a long time been propped up by the PSPP’s indiscriminate buying of their bonds, indiscriminate in as much as credit considerations are of no relevance. So Germany will outperform the rest and it matters very little as far as SSAs are concerned whether yield curves rise or fall. The key issue will be how swap yields perform relative to Bunds primarily and then of course to Holland and so on. It is here that we have perhaps seen the future. If Germany outperforms then swap spreads will widen which is exactly what has been happening for some time.”