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From the Floor: Hawkish Nowotny boosts euro and yields — #SaxoStrats

  • Hawkish Nowotny remarks drive euro and bond yields higher
  • Nowotny says ECB could raise deposit rate before refi rate and before QE ends
  • Bond yields rebound, 10-year Bund sets eyes on 50 bps
  • Asian stocks mixed on Friday; S&P500 rally fading fast in US
  • Relief from Dutch election outcome seen narrowing France spread further
  • Oil remains unsettled with focus on compliance with and extension of Opec cut
  • Saudi Arabia wants global oil stocks down to 5-yr average (200M b below current)
  • Oil retracing after finding resistance at first hurdle (WTI $49.65/b, Brent $52.69/b)
  • Gold and silver recovery running out of steam
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By John Acher

Hawkish remarks from European Central Bank council member Ewald Nowotny ignited a rally in the euro and drove bond yields higher late on Thursday, Saxo Bank's strategy team said on Friday.

Nowotny, the Austrian National Bank governor, said in a Handelsblatt interview the ECB could raise the deposit rate before its main refinancing rate, and could do that before completing quantitative easing. That would mean that the ECB does not need to follow the US model, which has been to finish bond purchases before tightening monetary policy.

“We had late yesterday the euro tacking onto its gains after some hawkish Nowotny comments,” says Saxo Bank’s FX strategy chief John J Hardy. (See also Hardy's FX Update here.)

“These comments are, of course, interesting for potentially seeing some of the rates coming up before the end of this calendar year,” Hardy says. “That saw the euro on the bid – we saw it above 1.0780 at one point.”
EURUSD traded at 1.0770 by 0938 GMT on Friday.

 ECB council member and Austrian central bank governor Ewald Nowotny
 (second from left), with the other members of the Austrian bank's 
governing board. Photo: Oesterreichische Nationalbank

Sterling got a lift on Thursday from a dissenting Bank of England hawk –  Kristin Forbes – wanting to hike rates, and the minutes suggested that other members are increasingly inclined to raise rates if inflation continues to climb.

Yields rebound

Bond yields have turned around, and US Treasury yields have regained nearly half of what they had lost, with the 10-year yield back up above 2.50%.

“So it seems like this theme of rising interest rates is the dominant one,” says Saxo Bank fixed-income trader Michael Boye.

The pattern is even stronger in Europe, where the 10-year bund yield is almost back to where it was before, up to 47 basis points and looking for another move to 50 bps and possibly beyond that, Boye adds.

“It was especially the Nowotny comments late last night, reconfirming the rumour that the ECB doesn’t have to follow the US model of first completing QE and then raising interest rates, but that they could start raising interest rates even before they have ended QE,” Boye says. 

Bunds slide after Nowotny hints at deposit rate increase
German yields
Source: Bloomberg and Saxo Bank 

Bonds from European periphery issuers enjoyed strong sentiment on Thursday, which could last on Friday, with help from the outcome of Wednesday’s Dutch parliamentary elections, which helped ease fears of a Marine Le Pen election victory in the French presidential election in April-May, Boye says. 

Oil unsettled
In the oil market, the rapid rise seen since Tuesday is running out of steam despite some support from US dollar weakness, says Saxo Bank’s commodities strategy chief Ole Hansen.

Crude oil ran into resistance at the first hurdle, in other words the 38.2% retracement of the recent selloff, at $49.65/barrel for WTI and at $52.69/b for Brent, Hansen says.

Oil losing steam after WTI's first failed attempt at $49.65/barrel, support seen at $48.35 /b
WTI crude oil price
Source: Bloomberg 

"So the market is not prepared to break much higher at this stage,” Hansen says. 

Saudi Arabia said it wants global oil inventories down to the 5-year average, and, if they do not fall to that level by the end of the first half of the year, then production cuts could be extended into the second half.

“They are basically saying that stocks need to come down by more than 250 million barrels over the next four months,” Hansen says, noting that oil inventories rose in January and were flat in February.

“So we need to see a dramatic reduction over the next three months for that to be achieved -- that is probably not going to happen,” Hansen says. “So on that basis the market will start to speculate about extending the production cut, and with that goes all the problems of getting unity, getting everyone on board, and that could create some nervousness in the market.” 

The impact of the past week’s selloff on hedge funds’ positioning should be visible in fresh data due after the close on Friday.

The downside risk for oil prevails. Hansen says he is looking for a break below $48/b in WTI and $51.15 for Brent, which would signal a return to Tuesday’s low, and the market needs to break back above the 61.8% retracement before some proper buying re-emerges.

The recovery in gold and silver are running out of steam, Hansen says.

Asian stocks were mixed on Friday. 

Saxo Bank’s equities strategy chief Peter Garnry says Hong Kong’s Hang Seng index has made a breakout, but Japan’s Nikkei is still trapped in a tight range, and the rally in the S&P500 seems to be fading fast.

S&P 500 momentum fading
SP500 index
 Source: Saxo Bank

“We didn’t really push through [in the S&P500], and yesterday was a very disappointing session given the initial reaction to the FOMC, so we are back in a tight range from 2,350 to 2,400 in the S&P 500, and a breakout at either level would be significant short term,” Garnry says.

Equity investors are now looking forward to first-quarter earnings reports, which in the US will start to arrive about three weeks from now. 

John Acher is a consulting editor at Trading Floor

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.


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