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From the Floor: Markets look to Draghi for clarity on QE—#SaxoStrats

  • • ECB governing council meets; decision due 1145 GMT, news conference 1230 GMT
  • • Markets are looking for clarity on the ECB's plans for tapering of QE
  • • Bank of Canada surprisingly raised interest rates
  • • US debt ceiling issue cleared by Trump's deal with congressional Democrats
  • • Fed vice chairman Fischer said he would step down in October
  • • Oil rally likely to stall ahead of $50/b on ample supply: Hansen
  • • Gold pauses on debt-limit extension and military not being first N.Korea option
  • • US braces for Hurricane Irma to hit Florida as a Category 4 storm
Saxo Strats banner
By John Acher

Financial markets keenly await the outcome of Thursday's meeting of the European Central Bank's governing council in Frankfurt and are looking for some clarity on the bank's plans for tapering of quantitative easing.

The ECB's announcement is scheduled for 1145 GMT, followed by ECB president Mario Draghi's news conference at 1230 GMT.

“Draghi will be talking for the first time in more clear language on what the trajectory is for the QE programme,” says Saxo Bank's equities strategy chief Peter Garnry.

“Judging from the experience in the US, if the trajectory and the wind down are very well communicated, it should not stir up markets in any negative way, but he will still have some difficulties – there will be a lot of questions about inflation, why they are doing it and in what areas,” says Garnry.

“He will try to be as dovish as possible, despite commenting on how to unwind the QE programme,” he adds.

In other central bank news, the Bank of Canada today surprised markets by raising the target for its overnight interest rate to 1%, against market expectations of no change, and US Federal Reserve vice chairman Stanley Fischer said will step down from his position in mid-October, eight months before his term expires.

“The Canadian rate hike decision was quite interesting – it was a surprise,” says Garnry.

Fischer has been a key ally of Fed chief Janet Yellen, and his exit is seen creating more space for US president Donald Trump to shape the Fed. Sources close to the Wall Street Journal suggested, however, that Trump is unlikely to nominate his economic adviser Gary Cohn to succeed Yellen as Fed chairman. Big leadership change expected over coming six months

Trump reversed course on the debt ceiling issue on Wednesday by reaching a surprise deal with congressional Democrats, upsetting Republicans and pushing the problem back at least until mid-December.

Meanwhile, the US is bracing for Hurricane Irma to hit Florida as a Category 4 storm, and in a worst-case scenario — given the higher property values in Florida than in Texas — the damage costs could be double the estimated $160 billion seen from Hurricane Harvey, says Garnry.

Garnry says that it would be worth watching hurricane-hit US property and casualty insurers for possible opportunities.

The gold price rally has stalled, partly on news of the US debt limit extension and on an easing of tensions as Trump seems to have stepped back from military action against North Korea, at least as a first option, says Saxo Bank's commodities strategy chief Ole Hansen.

"The deal announced by Trump, in cooperation with the Democrats, removed some of the pressure (on gold) ," Hansen says. "But with North Korea unresolved, I think the corrections are going to be shallow at this point."

Crude oil, which has been bid this week as the elevated post-Harvey short got squeezed, is running into resistance due to ample supply, with WTI prices likely to stall ahead of $50/barrel, Hansen says.

WTI crude oil hitting resistance
WTI oil priceSource: Saxo Bank

The upside for crude oil looks limited as the market still needs to digest a big overhang of supply after the disruptions caused by Harvey, and a seasonal slowdown in demand and rising Libya production are adding further layers of resistance, Hansen says.

Today brings fresh US oil inventory figures from the Energy Information Administration — a day later than usual due to this past Monday's Labor Day holiday — and the report is expected to show rising crude stocks against falling product stocks.

"But these numbers are going to be all over the place, so the impact could be limited at this stage, and the report could be distorted for some weeks to come," Hansen says. 

Mario Draghi
 ECB president Mario Draghi is expected to outline the bank's plans 
for tapering of QE. Photo: screengrab from ECB webcast

John Acher is a consulting editor at TradingFloor


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