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Market update: A QE anniversary gift from the ECB?

Traders were sitting on their hands on Thursday with markets calm ahead of possible turbulence surrounding the latest policy meeting of the European Central Bank.

Anything short of a further cut to deposit rate would likely be an outright disappointment while inaction on the size of monthly purchases could also leave markets wanting for more.

Cutting the deposit rate further into negative territory by 10bps to -0.4% is not without its problems. A number of prominent European bankers have spoken out about the cost of negative to rates to their company’s profitability. European banking shares have bounced in the last month. The MSCI European banking index has jumped 16% to above 50 after falling as low as 43 in February. Talk of tiered system by Vitor Constancio to protect some banks from negative rates may not be that desirable given the jump in the Japanese yen when the Bank of Japan did the same. Something not as widely touted, so could offer a positive shock within markets, is a cut to the main refinancing rate into negative

An increase in the size of QE from €60bn to €70bn or above would probably be well-received but reported divisions within the governing council would imply this is less likely. Given the limitations of the size of European bond markets and the fact that a lot of debt is ineligible because yields are too far into the negative, if purchases are increased, the ECB may need to expand the types of assets it can buy. The ECB buying European ETFs or stocks remains unlikely but corporate bonds are a possibility.

Asian markets were mixed ahead of the ECB with the Nikkei snapping a three-day losing streak as China stocks dropped after data showed inflation increased, limiting scope for PBOC monetary easing.

The reconfiguration of leading exchanges turned another corner on news Deutsche Bourse will sell US options exchange, International Securities Exchange for $1.1bn to Nasdaq. The deal going through is reportedly independent of the planned merger with the LSE but is a clear signal of intent by Deutsche Bourse.

Shares of Aviva were atop the FTSE 100 after the insurer reported higher than forecast annual operating profit and indicated its integration with Friends Life is ahead of schedule.

US markets look set for a slightly higher open with the eventual direction likely to be heavily influenced by the level of satisfaction in markets over any further easing of monetary policy by the ECB.

USA pre-opening levels

S&P 500: 2 points higher at 1,991

Dow Jones: 13 points higher at 17,013

Nasdaq 100: 3 points higher at 4,296


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