Mario Draghi skipped the Jackson Hole summit in Wyoming last week, due to heavy workload.
The market was probably correct.
If the ECB isn’t feeling enough pressure thanks to the premature promises Draghi made to the market last month, a flurry of bond auctions could crank the heat up a few more notches before the ECB‘s meeting next week.
Notably, Spain will attempt to sell two, three and four-year debt next week in what will be a crucial test of the market‘s appetite for periphery risk.
First is the disappointment scenario, which involves the further relaxation of collateral requirements.
Second is the compromise scenario, which entails both the relaxation of collateral rules and a cut to the repo rate.
Thirdly is the positive scenario that involves the purchase of sovereign debt, the relaxation of collateral rules, and the renunciation of seniority on the bonds the ECB purchases.
Lastly is the extremely Positive scenario, which is an amalgamation of all these features.
Credit Suisse sees the compromise scenario as the most likely outcome and so, it does not see the ECB announcing bond purchases at next week’s meeting.
As for its recommendation on how to play this eventuality, it recommends buying into weakness in short-term Spanish and Italian bonds, as it believes that eventually, the ECB will fulfill its promise and buy at the short-end.
It seems highly unlikely that the ECB will not announce some derivation of a bond purchase program next Thursday.
Failing to do so would be to send shock waves through the market.
However, investors should keep in mind that there is one wild card: the pending German Constitutional Court decision due September 12.
While many seem to believe that it is highly unlikely that the ESM (European Stability Mechanism) will not pass constitutional muster in Germany, Morgan Stanley sees “a probability of up to 40% on the Court granting an emergency injunction against the ESM, forcing the government to hold off until the Court has given its final verdict sometime next year”.
If the ECB should decide to postpone the finalization of the bond purchase program until after September 12 on the assumption that the German court will rule favorably and that ruling should disappoint, it could be extremely destabilizing for markets.
In sum, it is suspected that there will be some minimal version of a plan next week.
Will markets accept the lack of details calmly?
That’s the likely big danger for the coming week.