Article / 09 September 2016 at 8:00 GMT

From the Floor: 'Pivotal' ECB outing shows limits of central banks

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  • Chinese CPI data fall short of expectations, PPI numbers beat
  • ECB programme already 'way too large' for bond markets: Hardy
  • Central Bank standstill likely a positive for European insurers: Garnry
  • Oil markets 'buying first, asking questions' later after EIA print: Hansen
  • German 10-year bund yields almost positive following ECB's damp squib
From the Floor
By Michael McKenna

Yesterday's European Central Bank outing disappointed investors hoping for an expansion of the bank's current programmes (and possibly its mandate), but the decision may be more than an example of Mario Draghi and company simply declining further stimulus.

"The could mark a shift in central bank thinking", says Saxo Bank head of forex strategy John J Hardy; "the ECB can't do more."

Hardy explains that the central bank's current bond-buying programme is already too large for fixed income markets, adding that even the most dovish scenario in play yesterday would likely have seen the ECB merely nibbling at the margins with measures like purchase requirement adjustments.

"This could prove a pivotal event for global markets," says Hardy.

With under two weeks to go until the Bank of Japan and the Federal Open Market Committee meet next, investors will be looking for further evidence that central banks are planning to change their course. One early indicator here, says Hardy, is NZDUSD, where the kiwi has fallen by nearly one big figure lower versus the greenback since the ECB meeting.

"NZD is the world's number one carry currency," says Hardy, "and the ECB decision threatens the yield reach theme [afoot in FX markets for some time]".


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Source: Saxo Bank 

In stocks, Saxo Bank head of equities strategy Peter Garnry reports that the ECB "standstill" is likely to boost European insurers, with Italy's Generali an attractive candidate in the wake of yesterday's decision.

"We are looking to buy Generali with a stop at €11.25 and a price target of €13," he says.

Garnry is also looking at Twitter shares, which have dropped by 6% as buyout rumours evaporate. "There are no current bidders and the rally from $14 to $20/share was largely fuelled by buyout speculation, says Garnry, adding that the social media giant should look at cutting costs if it is to survive on its own.

"Twitter could cut costs by 33% – it shouldn’t take 4,000 people [to run the site]", says Garnry.

Reporting from Saxo's Singapore hub, Ryan Wu says that Asian stocks were mixed with weakness seen on the Nikkei, Kospi, ASX200, and SHCOMP indices and strong buying continuing to set the tone in Hong Kong.

"Hong Kong stocks have made their largest weekly advance in two months," says Wu, adding that the Asian trading day saw mixed data from China with CPI falling short of expectations (1.3% versus a 1.7% consensus) and PPI showing a slower slowdown than analysts had forecasted.

In commodity markets, the big story remains WTI oil after yesterday's EIA inventory numbers showed an ever larger drawdown than Wednesday's surprise API print.

Markets expecting a 0.5 million barrel surplus instead saw a 14.5m barrel decrease, placing oil traders into what Saxo commodities head Ole Hansen calls "buy first, ask questions later" mode.

"The EIA numbers reflected strong refinery demand and drove prices briefly north of $47.50/barrel," says Hansen, adding that he sees resistance coming in between $47.80 and $48/b on the WTI October future.

Hansen says that he will maintain the $47.80 take-profit level on his profitable SaxoStrats trade view posted Tuesday.

Finally, and to return to the centre of the ECB's "impact zone", Saxo fixed income trader Michael Boye reports that the "brutal negative surprise" out of Frankfurt say 10-year German bund yields drop a full point at open at 164.4 today. Yields, notes Boye, are "almost entering positive territory."

The move was felt at Europe's periphery as well, adds Boye, with Spanish 10-year yields rocketing sharply back into positive territory after hitting their all-time low yesterday before the meeting.

"The question now is whether we are seeing an overreaction," says Boye.

Turning point
Is global central bank policy headed for a sharp corner? Photo: iStock 

Michael McKenna is an editor at
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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