Tomorrow morning (North American time) the ECB will make its much awaited announcement which is almost sure to include some form of quantitative easing program. A series of leaks this morning, the most market moving of which was reported by Bloomberg, disagrees on the size and duration of the program to be announced. With the size ranging from 600 billion euros to 1.1 trillion euros and the duration ranging from 1 year to 1 year and 9 months.
With much of the surprise factor having been removed from the announcement, the program will have to come in at the upper end of the range (1 trillion or more) in order to continue goosing markets. There now exists a strong potential for some market disappointment in the event that the QE program comes in at the low end of the range, or even below the low end (under 600 billion euros).
Here are 3 ways to play the ECB announcement:
1. Long EUR/USD – the EUR/USD has fallen 1000 pips in a straight line during the past month and is oversold by any definition. Moreover, leveraged speculators have rarely been this short of the euro currency:
Conditions are ripe for a violent short squeeze rally and any disappointment from the ECB tomorrow could be the catalyst to set such a rally into motion.
2. Long energy stocks – A sizable QE program from the ECB should serve to stimulate some uptick in energy demand, at least in the short term. Deeply beaten down energy stocks could catch a nice short term bounce:
3. Long high-yield bonds (HYG) – High-yield bonds as represented by the HYG have been forming a bullish pennant for the past few weeks:
A QE program from the ECB will force bond investors out into riskier asset classes (such as equities and high-yield bonds) as higher grade sovereign bonds are gobbled up by the central bank’s voracious appetite for paper. An upside breakout from the bullish pennant in HYG could result in a quick 2-3% gain for investors.