As Markets Await ECB, the Devil Is in the Detail

Just two days to a key meeting of the European Central Bank (ECB) and markets already appear to be lapping up hints of what the ECB might do to alleviate pressure on struggling members of the euro zone.

Mario Draghi, president of the European Central Bank (ECB)
Hannelore Foerster | Bloomberg | Getty Images
Mario Draghi, president of the European Central Bank (ECB)

The euro received a boost overnight, and held onto the gains in Asia trade Tuesday, after ECB chief Mario Draghi was reported to have told a closed hearing of the European Parliament that the central bank could buy government bonds with maturities of up to three-years from euro zone countries such as Spain that have been grappling with high borrowing costs.

The ECB meets on Thursday against a backdrop of heightened expectationsthat it will now take decisive steps to end a debt crisis in the region and restore confidence in the beleaguered euro.

While the idea of the central bank stepping into buys bonds from troubled euro member states is not new, details of the kind of bonds it will buy is and the suggestion that the ECB will buy debt with a short duration is a positive sign, analysts tell CNBC.

“I think focusing on the shorter-end of the yield curve is the way to go,” said Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital in Sydney.

“If the ECB buys bonds of up to three-years then it’s sending a signal to countries like Spain that if we (the ECB) buy your debt, we’ll only do it for three years and after that you have to get your act together, I think that is reasonable,” Oliver told CNBC Asia’s Squawk Box on Tuesday.

“If they finance them for 10-years that’s a different matter; that relieves the pressure on Spain a bit too much,” he added.

Expectations of concerted action from the ECB have helped underpin equity markets, push down debt yields in Europe and boost the euro , which nudged above $1.26 overnight and has gained about 4.5 percent since Draghi pledged in late July to do whatever it takes to save the euro area from collapse.

“We have seen a bit of a bounce in the euro after the comments were leaked that Mario Draghi is considering buying bonds out to a three-year maturity. That was nice and specific, so we liked that and equities went higher as well,” said Sean Callow, Senior Currency Strategist at Westpac Bank in Sydney.

“So there’s no doubt that markets are expecting a positive outcome from the ECB and an in-principal agreement that the ECB does stand by to buy bonds, if the countries in question ask for help and jump through various hoops,” Callow said.

Analysts appeared confident that ECB would not disappoint markets.

“Hopefully they have got a good package together and we will see that at the end of the week,” Stephen Nash, Head of Strategy and Market Development at FIIG Securities told Squawk Box.

Certainly, more negative news for Europe on Tuesday appeared to be brushed aside as markets focused on the outcomeof the ECB meeting. Credit ratings agency Moody’s said it has changed its outlook on the European Union’s Aaa rating to negative to reflect the negative outlook on the ratings of the EU’s big budget contributors - German, France, the UK and the Netherlands.

Analysts said that with optimism running high in financial markets, investors would continue to focus on the details of potential ECB bond-buying plans.

“He (Draghi) would really have to deliver an absolute clunker to disappoint markets,” said Callow.

- By CNBC's Dhara Ranasinghe