OMT, principally in line with EU treaty – ECJ. Green light for Draghi & QE

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European markets opened with a lot of activity as the ECJ (European Court of Justice) prepared to give its counsel on the ECB’s OMT program which was started in 2012. Although the program never really kicked off, the outcome was important in terms of the legalities involved in purchasing bonds.

In the runup to the ruling, the Euro was noticeably volatility which was further fuelled by snap comments from Draghi who reiterated the same rhetoric that the ECB was standing by to buy sovereign bonds.

The EURUSD opened the day on a bullish note, after dipping to lows of 1.17524 yesterday. Ahead of the ECJ’s ruling, the Euro was trading above 1.18 psychological handle.

ECJ Ruling on Outright Monetary Transactions

The main take away from the ECJ’s ruling was that the OMT was in principle in line with the EU treaty, thus giving the ECB the green light to proceed with its sovereign bond purchase plan or QE

The main highlights of the ECJ’s ruling were:

  • ECB’s OMT, “in principle” in line with the EU treaty but needs to meet some conditions
  • The ECB must comply with “principle of proportionality”
  • ECB must justify its reasons for adopting unconventional measures such as OMT
  • ECB must allow formation of market prices in OMT
  • ECB must refrain from influencing conditionality in OMT
  • ECB should name “extraordinary circumstances” to launch OMT
  • OMT program is necessary and proportionate as ECB does not take on risk, making it vulnerable to insolvency

Implication of the ECJ’s ruling on ECB’s QE plans?

The result of the ECJ’s ruling definitely eases the pressure on Mario Draghi’s plans for QE at least in terms of legality. However, Draghi still needs to get the Germans on board to ensure that the quantitative easing plans proceed smoothly without any hiccups.

Ahead of the ECJ’s ruling Draghi’s comments on sovereign bond purchases were being viewed by the market as an unofficial confirmation from the ECB Chief. It is, therefore, likely that the ECB will be announcing its QE plans at its monthly monetary policy meeting next week, but could hold off from diving into the details at least until February or March.

This shifts the markets focus on the size and scope of the quantitative easing. Market participants at this point view that anything short of €500 billion will be disappointing and the Euro is likely to react very bullishly should the QE size disappoint.

The Euro was trading near 1.179, unfazed by the news. Equity markets were also relatively muted as the German DAX was trading near the daily highs of 9866, while the Stoxx50 was modestly higher trading near 3100 handle. However, as the day progresses, we can expect the equity markets start to lift higher as the markets digest the news of the ECJ’s ruling.

Later during the US trading session, US retail sales for the month of December is on the tap with the expectations low, a surprise to the upside could possibly quell any rallies in the Euro during the intra-day.

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