Mr Cœuré reviewed recent financial market developments.
Since the Governing Council’s previous monetary policy meeting on 2-3 September 2015, the main event for market participants had been a postponement of the expected first rate hike in the United States, following the last Federal Open Market Committee (FOMC) meeting on 16-17 September. This had reverberated in different ways through international bond and foreign exchange markets and to the euro area, where, over the same period, market expectations of additional monetary stimulus measures had increased.
Regarding developments in international markets, market expectations of an increase in the target range for the federal funds rate by the FOMC in 2015 had been receding owing to increasing uncertainty, linked partly to macroeconomic developments and partly to the reference to global economic and financial developments in the FOMC’s statement. According to the federal funds futures-implied curve, in mid-October the market was assigning a probability of around only 30% to a rate hike by December 2015, while the first rate increase was fully priced in only by around mid-2016. Moreover, ten-year US Treasury yields had temporarily reached their lowest levels since April 2015, at slightly below 2%, while the US dollar had depreciated against all major currencies, as well as emerging market currencies.
The change in market expectations regarding US monetary policy had supported risk sentiment globally. Equity market indices had bounced back from their September lows, emerging market currencies had stabilised and implied volatilities had started to decrease across market segments. Brent crude oil prices had temporarily rebounded to above USD 50 per barrel. Moreover, beyond their direct impact on euro area government bond yields, developments in the United States had had an indirect impact on the euro area through the expectations channel. In that context, market participants were increasingly discussing three possibilities with regard to a further easing of the ECB’s monetary policy stance: first, an increase in the monthly volume of purchases of euro area government bonds; second, an extension of the asset purchase programme (APP) beyond September 2016; and, third, a further lowering of the deposit facility rate.
Euro area government bond yields had been on a downward path since early June, with the increase in expectations of further monetary easing in the euro area and the continuation of purchases under the public sector purchase programme (PSPP) further contributing to this trend, together with the impact of developments in global bond yields. The implementation of the PSPP had remained smooth, despite somewhat less supportive market liquidity conditions during the summer. No sizeable demand for borrowing securities under the securities lending facility had been observed, as conditions had remained normal in the repo market.
Looking at countries under financial assistance programmes, both Greece and Cyprus had recorded a sharp downward adjustment of sovereign bond yields, due in Greece to a perception of increased political stability and the start of discussions on the implementation of the Memorandum of Understanding, and in Cyprus to the successful conclusion of the last two review missions and the inclusion in the PSPP of that country’s sovereign bonds.
After seven months of the three purchase programmes running in parallel, primary market data for covered bonds and corporate bonds suggested better financing conditions for banks and corporations, which were reflected in their ability to raise funding in higher volumes and with longer maturities.
Activity in the euro area interbank money market had remained moderate as a result of ample excess liquidity, which had reached approximately €500 billion on 20 October and was expected to further increase at a steady pace owing to the ongoing APP. Cash rates had remained relatively stable, with overnight maturities trading near -20 basis points and the EONIA rate hovering around -14 basis points. By contrast, EONIA forward rates, as well as derivatives markets, had shifted downwards as a result of changing expectations regarding monetary policy in the euro area. EONIA forward contracts starting from June 2016 were currently trading close to, and on some days even below, the level of the deposit facility rate of ‑0.20%. Regarding the targeted longer-term refinancing operations (TLTROs), the fifth operation, carried out on 24 September 2015, had resulted in an allotment of €16 billion, bringing the total recourse to TLTROs to €400 billion, which currently represented 75% of the Eurosystem’s outstanding credit operations. Market analysts attributed the low take-up to improving funding conditions, especially in those countries where short-term funding markets had reopened at sizeable volumes, and to the comfortable liquidity position of banks.
Source: ECB Eurosystem
