UPDATED 11.30am
The euro and Euro-area sovereign bonds dropped but were not exactly going into freefall after the German constitutional court gave a mixed ruling on the ECB’s bond buying programme. Judges said the asset purchase programme partially violated the German constitution, but on a key point it did not say the ECB’s actions constituted monetary financing. And it said the ruling has no bearing on the Pandemic Emergency Purchase Programme for the Covid-19 response. Relating to long-standing Public Sector Purchase Programme going back some years under Mario Draghi, the court said the ECB needs to show that the scheme is ‘not disproportionate to the economic and fiscal policy effects.
Essentially the Bundesbank won’t be allowed to take part in PSPP unless the ECB proves, within the next three months, that QE was proportionate. If not, the Bundesbank won’t be allowed to take part, and would need to pay back bonds already bought under the scheme.
Without being German constitutional experts, it seems to boil down to the central bank ‘proving’ to a German constitutional court that its actions were taken in good faith and were proportional to the economic risks. Are the German judges saying the ECB didn’t know what it was doing? How do you retrospectively argue that your actions were proportionate? It seems absurd to think that the ECB ever committed to anything that it considered disproportionate. PEPP is not affected by the decision, despite the looser rules. This may imply that it is already viewed as ‘proportionate’, in the eyes of the judges. However, the point was this case dates back years to PSPP and never was about PEPP - what is to stop cases being lodged now in relation to PEPP?
Fundamentally, anything that throws doubt on the ability of the ECB to provide the backstop to the bond market is a concern. The market is trying to figure this one out as the ruling is complex. For now, downside risks persist for the euro and bonds, especially peripheral debt, will be under pressure. We await the ECB’s response with the utmost interest.
9AM: Attention this morning was on the German constitutional court and its ruling on the ECB’s long-standing bond buying programme. This could limit the amount of bonds the Bundesbank can buy, potentially creating a rift with the ECB and other member states. The real concern is whether it could affect the €750bn Pandemic Emergency Purchase Programme (PEPP), which has much looser rules than other QE programmes. It’s high stakes – if the court blocks the Bundesbank from participating in QE it would be curtains for the ECB and creates significant Eurozone breakup risks. The good news is that the judges probably realise this. High stakes but the risk of serious ructions appears low. The European Court of Justice has already ruled in favour of the ECB’s bond buying, so it’s hoped the German court will not rock the boat at this critical moment.
EURUSD was lower, breaking down at the 1.09 support having failed to sustain the move above 1.10 last week, which could open move back to around 1.0810. The euro seems to be displaying some degree of stress this morning ahead of the German court ruling.
European markets rose after Asian equities made some gains. Markets in Japan, South Korea and China were shut for a holiday, but Hong Kong and Sydney rose. Wall Street closed a little higher after bulls pushed the S&P 500 into positive territory only in the final hour of trading yesterday. There is a little more risk appetite as oil prices climb.
The Reserve Bank of Australia left rates on hold at the record low 0.25 per cent and seems to be well dug in here. The RBA won’t go negative and won’t hike until the Covid-19 crisis is well in the rear view mirror. This is a pattern being repeated by most major central banks.
Oil continues to make steady gains with front month WTI to $22 on hopes lockdowns are being lifted. Read Chris Dillow's take on what the oil price means for equities. The idea that we will be moving around anything like as much as before is fanciful, at least in the near term - listen in to this week's Investment Hour podcast for more on this. New Zealand is going to be shut to foreigners – except perhaps their pan-Tasman pals – for a long time to come, the prime minister says. Ryanair has reported passenger numbers in April fell 99.6 per cent and sees minimal traffic in May and June. Carnival is getting cruises going again – tentatively – in August. New car registrations in the UK collapsed in April, falling 97 per cent to just 4,000 vehicles.
API data later today could show a very small build in inventories, but as always we prefer to look at tomorrow’s EIA figures. A small build would give more hope to oil bulls that the glut is not as bad as feared, however I would caution that we are simply seeing inventories naturally build more slowly as we approach tank tops.
EURUSD wobbles
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Neil Wilson is chief markets analyst at Markets.com
