Fundamentals and valuations still support overweight EUR vs. USD IG spreads – Goldman Sachs
10 December 2015, 07:14
0
40
Research Team at Goldman Sachs, notes that the ECB's new measures fell short of market expectations.
Key Quotes
“Besides the cut in the deposit rate from -0.2% to -0.3%, the council decided to extend the asset purchase program to March 2017 from September 2016 previously while leaving the flow of monthly purchases unchanged at EUR60bn. This extension will raise the total program from EUR1.1trn to close to EUR1.5trn.”
“Other measures included the reinvestment of the principal payments from asset purchases “as long as needed” and the addition of regional and local government bonds in the pool of eligible securities for purchases.”
“During the press conference, president Draghi's tone was less prone towards further easing even though he did emphasize on the flexibility of the current program. As discussed by our FX team, yesterday's outcome further damaged the credibility of ECB QE.”
“...but fundamentals and valuations still support our overweight EUR vs. USD IG spreads. We continue to think the case for being overweight EUR vs. USD IG spreads is firm. Granted, the ECB disappointed expectations, but US and Euro area monetary policies are still set to diverge.”
“In addition, we continue to expect credit quality in core Europe to remain friendlier than its US counterpart. Finally, EUR IG 5-year spreads now trade 5bp wider than its USD counterpart, and after removing Energy and Metals/Mining, the differential grows even wider to 20bp.”
Key Quotes
“Besides the cut in the deposit rate from -0.2% to -0.3%, the council decided to extend the asset purchase program to March 2017 from September 2016 previously while leaving the flow of monthly purchases unchanged at EUR60bn. This extension will raise the total program from EUR1.1trn to close to EUR1.5trn.”
“Other measures included the reinvestment of the principal payments from asset purchases “as long as needed” and the addition of regional and local government bonds in the pool of eligible securities for purchases.”
“During the press conference, president Draghi's tone was less prone towards further easing even though he did emphasize on the flexibility of the current program. As discussed by our FX team, yesterday's outcome further damaged the credibility of ECB QE.”
“...but fundamentals and valuations still support our overweight EUR vs. USD IG spreads. We continue to think the case for being overweight EUR vs. USD IG spreads is firm. Granted, the ECB disappointed expectations, but US and Euro area monetary policies are still set to diverge.”
“In addition, we continue to expect credit quality in core Europe to remain friendlier than its US counterpart. Finally, EUR IG 5-year spreads now trade 5bp wider than its USD counterpart, and after removing Energy and Metals/Mining, the differential grows even wider to 20bp.”
