Weekly Report

Looking forward the key event will be the European central bank policy meeting. Measuring ECB speak and market consensus it seems that Draghi is preparing for some type of policy action, however risk of disappointment is high. The highest probability event is for a 10bp-15bp cut in the deposit and refi rate. Which now seems to be fully priced by the market. We also view the adding of measures to encourage extension of credit aimed at banks (FLS/LTRO) as a significant possibility, which would provide a small surprise. But the announcement that would illustrate that the ECB is ready to take critical steps to stave-off deflation with largescale American style asset purchases looks unlikely (estimates of size starts at €1trn). So a mild cut in rates plus action to support credit transmission mechanisms into the periphery is the high probability results, will not impress the market. The lack of innovation and commitment by the ECB is likely to lead to a cutting of EUR shorts in the near term.