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Money markets euribors rise on rate cut, lending to remain dry


* Euribor futures rise on refi rate cut* Deposit rate cut weighs on Eonia rates* Rate reductions seen having limited impact on lending, economyBy Ana Nicolaci da CostaLONDON, July 5 Euribor futures rose on Thursday after the European Central Bank cut its interest and deposit rates in a bid to shore up a flailing economy and a struggling banking system. The ECB cut its main refinancing rate by 25 basis points to a record low 0.75 percent, as expected, after a recent bout of downbeat economic data suggested the euro zone debt crisis was even taking a toll on Germany, the bloc's biggest economy. The monetary authority also reduced its deposit rate to zero from 0.25 percent, putting pressure on Eonia rates and making it less attractive for banks to park their cash at the central bank overnight. The move was considered symbolic only days after a European Union summit agreed to a more flexible use of the euro zone rescue funds - surpassing market expectations and offering euro zone debt markets fleeting respite. But the rate cuts are expected to only have limited impact on the real economy and on banks' willingness to lend to each other again, analysts said."Economic data recently were very weak and after the European summit which had been received positively by the ECB, it was clear that (ECB President Mario) Draghi and the ECB wanted to reciprocate," Matteo Regesta, strategist at BNP Paribas, said.

Business surveys this week suggested the euro zone economy contracted between April and June, while data showed unemployment in the currency bloc hit a new euro-era high in May."The ECB expects (the deposit rate cut) to encourage banks to lend cash to the broader real economy as they don't get remuneration anymore from lending to the ECB," Regesta said. "That's the idea, whether they do it is another thing."Euribor futures rose across the curve after the rate decision and stood between 5 and 9.5 basis points on the day across September 2012 and December 2014 contracts. Euribor rates were traditionally used as a gauge of interest rate expectations but excess liquidity in the market from two injections of long-term cash from the ECB has made it more difficult to use them as such. Analysts who took a shot at it said the move in Euribors was a readjustment after the rate decision and markets were not currently pricing in any further monetary easing.

EURO SLUMPS In theory, a cut in interest rates would stimulate lending by making it cheaper for banks to borrow from the ECB at refinancing operations, and a reduction in the deposit rate would make them more willing to lend to each other instead of placing their money at the ECB overnight. A rate cut in the deposit rate to zero - which acts as a floor to money market rates - put downward pressure on Eonia rates and Eonia forwards.

In practice, analysts do not expect bank lending to normalize because banks are still worried about each other's exposure to risky sovereign debt. Some also think zero percent returns at the deposit facility would not be enough to discourage them from parking their money at a safe place like the ECB in the current environment."The cost of borrowing for banks at the ECB operations has dropped because the cost of borrowing at the ECB is basically (based on) the refi rate ... so banks now have to pay a lower price for the ECB liquidity," Giuseppe Maraffino, strategist at Barclays, said. This was positive for peripheral banks, but may not be enough to boost lending, he said:"There is a problem of balance sheets ... I don't think these measures will support lending to the economy by banks."The rate cut could help the real economy by weakening the euro and boosting exports, Regesta added. The euro slumped against a range of currencies on Thursday and hit a one-month low against the dollar after the ECB rate decision. Others in the broader market were disappointed that the ECB did not opt or hint at more dramatic measures such as buying government bonds or flooding banks with fresh liquidity. Spanish and Italian bond yields spiked as a result.

Money markets fed rate hike bets on the rise, seen outpacing ecb


* Markets pricing in post-2014 U.S. Fed interest rate hike* ECB seen lagging as debt crisis slows economic growth* Eurodollar longer-dated contracts to extend lossesBy William JamesLONDON, March 26 Markets are upping bets that the U.S. Federal Reserve will hike interest rates sooner than expected as the world's biggest economy recovers, with U.S. rates seen rising faster than those in the crisis-hit euro zone. A run of strong economic data has raised speculation that the Fed may need to look again at its commitment to keep interest rates low until the end of 2014."Obviously after the last (Federal Reserve) meeting we've had more and more market participants questioning whether the Fed will keep rates so low for so far out. That's a reasonable question," said Elwin de Groot, market economist at Rabobank. Despite some spillover from the United States, euro zone interest rate futures reflect a more cautious long-term outlook, with fears that low growth would hurt the bloc's chances of escaping its long-running debt crisis.

"Yes, there is a correlation with the U.S., but (Europe) has its inherent fundamental problems which are very much ongoing," said Simon Peck, strategist at Royal Bank of Scotland. As a result, the U.S. Eurodollar futures curve - which shows how quickly markets expect rates to rise - has been steepening to show a more aggressive Fed rate-hiking cycle. Euro zone-equivalent Euribor futures have steepened less. The interest rates implied by Eurodollar and Euribor futures reach parity around 1.5 percent in the first quarter of 2015, six month earlier than markets were anticipating just two weeks ago. U.S. rates then accelerate above the euro zone. The U.S. base rate is currently 0.25 percent, compared with 1 percent in the euro zone, meaning that for rates to converge the Fed has to hike more aggressively than the European Central Bank.

RBS strategists look for increasing divergence between euro zone and U.S. rate futures contracts dated between March 2014 and March 2015. In the event of continued strong U.S. data for April and May, Eurodollar contracts expiring between 2014 and 2016 were most likely to sell off, implying expectations of higher rates, RBS said. LONG ROAD AHEAD One driver behind this change in outlook are the different approaches of the Federal Reserve and the ECB to managing policy expectations.

While the ECB never pre-commits on rate changes and gives few hints on long-term rates, the Federal Reserve has used assurances of "low rates for longer" as an important element of its monetary policy. As a result, the Fed's commitment had heavily suppressed rate rise expectations for the next two years. But continued strong data has emboldened market participants to price in a change of heart by the Fed, and with rate expectations at rock-bottom levels the repricing could have much further to run, said Simon Smith, chief economist at FxPro."It probably is a sustainable trend... whereas there was once a 'Don't fight the Fed' view, now we've seen a decent-ish run of data so far this year markets are feeling a bit more brave," he said. Nevertheless, while the long-term view may be for higher U.S. rates, there remain many hurdles that could derail the current trend well before a rate hike becomes a reality."If you look at the U.S. economic situation, obviously it's improving now but from a longer-term perspective they still have to redress their deficit problems and that may imply a negative outlook on the economy," Rabobank's de Groot said."You could argue that once they start trimming back the deficit more durably, actually the Fed will have to be there to support that process and keep rates low."