Global daily insight 23 september 2016

Daily Insight

Group Economics Macro & Financial Markets Research

23 September 2016

ECB back in court?

US consumer fal Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

Euro government bonds: Legal challenges to QE could set scene for steepening – The FT published an article on Thursday morning (see FT: ECB fears legal action will rein in scope for QE) reporting that the ECB was concerned about a legal challenge to some of the options it was considering in order to expand the universe of eligible assets for its QE programme. It notes that not only the scrapping of the capital key allocation system for purchases, but also the raising of the issuer limit were policy options that would come under legal challenge from the conservative German economic and political establishment. It is notable that no such a challenge is mentioned in relation to the dropping the deposit rate floor (the rule that it cannot buy bonds yielding below the deposit rate), which may make it then the only viable option to increase the eligible universe. If the ECB would take that option (especially if combined with dropping the 2y minimum maturity for purchases) it would lead to a significant (bull) steepening of the yield curve, with the short end outperforming. It would also potentially be a negative for peripherals as dropping the deposit rate floor does not change the relative amounts of each country the ECB would buy, which is in sharp contrast to the dropping of the capital key. (Nick Kounis).

Euro Banks - EUR 45.3bn borrowed from ECB under TLTRO II - Eurozone banks borrowed EUR 45.3bn from the ECB in the second round of the TLTRO II loans. Part of the funds were probably used to repay existing loans, and the net take-up might have been more in line with that of the first TLTRO II in June (EUR 31bn). The interest rate to be paid on these loans is zero, but could fall to as low as the deposit rate (-0.4%). Banks will receive the maximum discount on interest payments if loans to non-financial companies and households (excl. mortgages) would have grown by 2.5% between January 2016 and January 2018. Indeed, since January the average monthly increase in the outstanding amount of these loans in the eurozone as a whole (EUR 6bn) has been slightly above the pace needed to receive the maximum discount. That said, loan growth tends to follow economic activity with a delay and the pick-up in bank lending seems to be largely due to the ongoing moderate economic recovery and low level of interest rates, which has lifted demand for loans. As such, the TLRTO II does not seem to have been a game changer.

There are two more TRLTO II loans on the agenda (December and March). When the programme was announced, we expected a total net borrowing of EUR 100-200bn (EUR 500bn – 600bn in gross terms). The result of the first two loans suggest the total will probably be in the lower half of this range. (Aline Schuiling) Global Markets: Fed rally continues – The rally across global financial markets continued following the re-assuring message from Wednesday’s FOMC meeting (for more see our note Global Daily Insight – Fed: case for rate increase in December strengthens). Although the Fed still looks like it is heading for a rate hike this year (and it is almost 60% priced in by futures markets), the scaling back of the Committee’s forecasts for next year (from 3 hikes to 2), provided investors with plenty of comfort. At time of writing, the S&P 500 was up by around 0.7%, building on Wednesday’s post-FOMC gains. The euro Stoxx was up by 2.6%, while the Nikkei was up 1.9%. Government bonds also saw a strong performance. US 10y

Insights.abnamro.nl/en

Bloomberg: ABNM

2

Daily Insight - ECB back in court? - 23 September 2016

Treasury yields declined by 3bp, to 1.62%, which is broadly in line with our year-end forecast. Though the more spectacular gains were in the eurozone, with 10y Bund yields down 8bp to -8bp. We think that there is room for Bunds to rally further in coming months, as we expect the ECB to extend the horizon of its QE programme in December. Meanwhile, the riskier parts of the bond market performed even better, with peripheral and credit spreads tightening. The losers from the dovish Fed move in markets were predictably the dollar and gold. Our base case remains for a very slow Fed tightening cycle (one hike this year and two next), with risks tilted towards an even more sluggish normalisation. (Nick Kounis)

DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer.

No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in th e document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such information. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information con tained in this document after the date thereof.

Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. Š Copyright 2016 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO

3

Daily Insight - ECB back in court? - 23 September 2016