Article / 24 May 2016 at 8:21 GMT

From the Floor: Japan lays yen intervention marker

Managing editor, / Saxo Bank
  • Japan's finance minister defines ¥5 two-day move as "disorderly" market
  • Aso effectively lays marker for the conditions for intervention — Moltke-Leth
  • Two-day, ¥5 move doesn't happen "many times" — Hardy
  • European banks "disastrous" as shareholder value "destroyed" — Garnry
  • ROE relative to overall economy deteriorating on "relative basis" — Garnry
  • Bayer/Monsanto deal unlikely to pass regulators as bond slides —  Boye
  • Brent longs/short ratio hits "new extreme" of 16 — Hansen
  • Oil selloff could hurt net long position significantly
  • Click on this link for a reply of our morning call 


By Martin O'Rourke

Conditionally speaking

Japan's finance minister Taro Aso took the unusual step overnight to reassert the country's position on a possible intervention on the yen after receiving something of a rap on the knuckles at the G7 meeting over the weekend.

"Aso noted that different countries have different views and he defined a 'disorderly' market as a two-day, ¥5 move in the currency as potentially leading to an intervention", reports Christoffer Moltke-Leth from Saxo Bank's Singapore hub.

Aso was pointing to the ability to intervene if there is intense movement in a short period of time", says Saxo Bank's head of forex strategy, John J Hardy. "But it is not too many times that you see a ¥5 move over two days".

This should be seen as a toning down of the remarks made over the weekend after Aso and his US counterpart effectively agreed to disagree on intervention, says Hardy.

Hardy nevertheless expects the yen to strengthen pointing to the ongoing hawkish noises out of the Fed that could send equities over the edge.

"The S&P Futures below 2,025 means potential capitulation time and we could see yen stronger across the board", says Saxo's forex chief.

Asian equities were certainly in no mood to raise the ramparts Tuesday and Moltke-Leth drew the link between "a bit more hawkish Fed talk" and the prevalent "wait-and-see mode" in equities. "Fed speak is definitely the top hurdle to a bounce back in equities and that is being exacerbated by the event-risk month that we have ahead of us".

USDJPY was at 109.33 at 0655 GMT.

The dollar may have been retreating against the yen, but elsewhere, it was bullying emerging market and commodities-led currencies on the back of the Fed hawk talk with the needle on USDTRY, AUDUSD and NZDUSD all swinging in favour of the greenback. 

USDTRY is rising on the back of a hawkish Fed and turmoil in Turkey

 Source: SaxoTraderGO

Don't bank here

Saxo Bank's head of equities strategy Peter Garnry has a stark warning on the European banking sector where the "outlook is getting weaker and weaker".

"We continue to stay underweight in line with our view since Q3", says Garnry. "If you want to be selective, then maybe Barclays looks likes a good turnaround with considerable upside compared to Deutsche Bank which continues to be a mess".

According to Garnry, the sector as a whole is underperforming and "it is a disastrous industry at the moment".

He compares the price of banks in Europe compared to the overall economy which shows the breakout in the ratio from a range at the time of the financial crisis in 2008 from where the ratio has "been trending higher and higher". 

"Basically this spread differential shows return in equity deteriorating on a relative basis and for banks this on an absolute level is below the cost of equity", says Saxo's equities head. "There is a lot of shareholder value being destroyed so stay underweight".

The banks break out from range after 2008 and trend higher


 Source: Bloomberg, Saxo Bank

Garny also casts doubts on the mooted $62 billion takeover of Monsanto by German chemicals giant Bayer given the likely lack of go-ahead from the regulators. 

"There is a general sense of mergers and acquisitions fatigue", he says. 

It's a theme fixed income trader Michael Boye also warms too, warning that Bayer faces a negative rating by ratings agency Standard & Poors which has also run parallel to a slide in the Bayer 2.375 PERP 2022 CALL bond. 

"There's a lot of focus on the impact on its credit rating and investors are very worried about its leverage", says Boye. "The rating downsize from S&P could be as much as two notches".

"The Bayer bond dropped quite a way and could go further south if it loses the investment grade status, but a regulatory disapproval of this venture could see a bounce back".

Bayer's sliding bond may go further south
And finally....

There is a dangerously long Brent position building that could turn very ugly if there is a sudden selloff, warns Saxo Bank's head of commodities Ole Hansen, speaking live from the Copenhagen floor.

"The Brent long/short ratio is at the extreme high of 16", he says. "That's all well and good while the market remains supported, but if we run into a selling structure, then we could have a bit of a problem as these longs look to sell".

Brent longs added some 75 million barrels positions last week.

"The oil contango has also collapsed which means companies are borrowing money to keep oil on ships in the hope that prices will rise", he adds. "While the longer-term view on oil is positive, this is not a healthy situation in the short term".

Both Brent and WTI crude were below $48/barrel at 0813 GMT.


 Brent long positions have accumulated to a dangerous level. Photo:iStock

Martin O'Rourke is managing editor at Saxo Bank

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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