Article / 03 September 2015 at 9:04 GMT

From the Floor: Markets ready to pounce if ECB dovish

Consulting editor / TradingFloor
Norway
  • Any sign of dovishness from ECB would soften euro, help risky assets
  • ECB policy announcement 1145 GMT, Draghi news conference 1230 GMT 
  • EURUSD has "tremendous potential" to move, says Saxo Bank's John J Hardy
  • China markets closed today and tomorrow for WWII commemoration day
  • Nikkei up in wake of higher US Wednesday close 
  • Swiss franc weakening noticeably vs dollar and euro

From the Floor Banner
















By John Acher and Clemens Bomsdorf

Markets keenly await news at 1145 GMT from the European Central Bank's monetary policy meeting, which could be compelled to lower its inflation forecast, especially for 2016, and possibly boost its quantitative easing programme to restore some of the oomph it has lost in recent months.

Any dovishness in the bank's statement or in remarks from ECB chief Mario Draghi at a 1230 GMT news conference in Frankfurt would soften the euro, while riskier assets, such as south European bonds and high-yield corporate bonds, could benefit from a boost to QE, says Simon Fasdal, Saxo Bank's head of fixed-income trading.

The ECB has injected more than €300 billion into the European economy through its bond-buying programme, but the market effects of that measure are rapidly vanishing and the bank may choose not to wait any longer to restore its force, Fasdal says.

"I think they will have to lower the inflation forecast," Fasdal says. 

Especially the bank's 2016 forecast for inflation of 1.5% is in the firing line, as 2015 is mostly history in terms of forecasting, said Saxo Bank's FX strategy chief John J Hardy.

"A strong downward revision of this (2016 forecast) would be seen as quite dovish and as an indication that the ECB is more likely to reach into the toolbox for more easing measures,” Hardy said. “Of course any 2017 forecast lowering would also be interesting.”

EURUSD
 

"Tremendous potential"

EURUSD could be at 1.15 if the ECB is nonchalant and risk-appetite is weak again and US data this week are poor, but it could fall to 1.10 if the ECB is dovish, risk sentiment is quite solid and US data are good, Hardy said.

“So tremendous potential (in EURUSD), and even those levels, which are 250 pips or so away from the recent spot price, are well within recent ranges, just to remind you of how much volatility we have seen of late."

Fasdal said it was "highly probable" the ECB would deliver some verbal support for QE today, with statements such as that the bank stands ready to do "whatever it takes." 

The ECB, Fasdal said, could also add further fuel to the present QE, by, for instance, saying the bank could up the monthly amounts or extend the programme beyond Sept 2016.

"That would be extremely bullish for risky assets," Fasdal said, referring to debt of southern European issuers Italy, Spain and Portugal as well as high-yielding corporate bonds. 

"We are out in the higher end of the long-term (yield) range here," he said, pointing to corporate bonds. "This is where to put money if you are an ECB believer."

"Yields are creeping back up, totally against the intention of the QE programme," he said.

Elsewhere on the FX radar, Hardy said the Swiss franc has been "weakening quite noticeably” and that the CHF was through to new recent lows against the euro and dollar.

Chinese holiday brings respite

Asian markets other than China saw a day of much less volatility, with China and Hong Kong exchanges closed for celebrations of the anniversary of Japan’s WWII defeat.

“The markets are in a wait-and-see mode ahead of the ECB meeting today and US non-farm payrolls tomorrow,” said Saxo Bank's Christoffer Moltke-Leth from the Singapore desk.

The Nikkei took a lead from the US market where the S&P posted solid gains overnight.

Toshiba rebounded 3.5% after saying it will release earnings this week following an accounting scandal that has gone on for months. NTT DoCoMo rose 7% on several analyst upgrades.

Meanwhile, Australian retail sales unexpectedly fell 0.1% in July, the first drop since May 2014, suggesting that the Australian economy remains weak at the beginning of the third quarter.

Commodities currencies and emerging market currencies softened in Asian trading.

European stocks opened firmer on the back of a light rally in the US overnight, and calmer than in recent days due to the Chinese holiday.

Budget airline eaysJet said it expected to come with a record full-year profit, and Vivendi reported numbers showing it missed the expectations for adjusted income, but announced it was in talks on some kind of cooporation with Telecom Italia,  Adam Seagrave from Saxo Bank's London desk reports.

Syngenta announced a share buyback worth $2 billion. “That is quite an aggressive statement from the company”, says Seagrave, and points out that Syngenta saw its stock price fall after the takeover bid by Monsanto did not succeed.

"Ridiculous volatility" in oil

The oil market has shown “ridiculous volatility,” says Saxo commodities head Ole Hansen, pointing to an analysis of standard deviations that showed the past week's price swings were way beyond normal, such as last Thursday's jump which should happen only once every six centuries.

“Yesterday we traded in an almost 8% range,” he says, adding that “We found some weakness following the inventory report from the US, where inventories rose, refinery activity slowed, but, as we saw stock markets improve and risk appetite returned, we saw a bit of a bounce into the close”.

Oil
 
Iranian oil production is expected to come back in the market next year as US President Barack Obama secured Congressional support for his Iran deal.

Defence of market shares remains a priority in the oil market over price at this stage, Hansen says. 
gold
 
The support for gold again was fading after the stock markets’ bounce. Industrial metals recovered a bit at least. Here it should be kept in mind that China is taking a break due to holidays. Uncertainty is still high. Silver was up and reached Saxo Bank's first profit target of 77 yesterday.

Rollercoaster gold
Ready for the ups and downs of the gold market? Photo: iStock
 
John Acher is an editor at TradingFloor.com

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Editor’s note: From the Floor takes advantage of TradingFloor.com'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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