Credit Suisse sees plenty of scope for volatility after ECB decision

The Fed was headed towards an interest rate hike and the European Central Bank towards easing - despite the diminishing returns of some of its policy alternatives - just as market liquidity was set to evaporate, the broker said in a research note.

The final stretch of the year would also be marked by the French regional elections on 6 and 13 December, followed by Spain´s general election on 20 December.

That meant there was "plenty of scope for volatility," according to the broker´s fixed income team.

If the ECB surprises it will be on the size of its cut to the deposit rate

As regarded the ECB policy decision on 3 December, the broker´s central view was that the ECB would announce it would run its €60bn a month asset purchase programme "at least until March 2017" (instead of September 2016) and cut its deposit rate by 10bp to -0.3% from - 0.2%.

However, the greatest scope for a surprise - a constant risk under Mario Draghi´s presidency - from the ECB lay in the potential for a larger than expected reduction in the deposit rate.

While it would be slightly negative as it would eat into banks´ margins, it might be a positive for euro area growth and inflation if it succeeded in weakening the currency.

To take note of, the Swiss broker pointed out that if the ECB decided to 'over-deliver' on a cut to the deposit rate then that could impact on the US Federal Reserve´s own decision-making, when it met on 15-16 December.

"If the FX reaction is powerful, a surprise on the ECB deposit rate in December may well have significant repercussions for the reaction function of other central banks. Not least the Federal Reserve two weeks later."

An extension of QE to even further out than March would be largely meaningless, while a higher pace of QE would come at the cost of less market liquidity, although all else equal it would provide more of a boost, the Swiss broker said.