Article / 22 July 2016 at 9:28 GMT

From the Floor: Sleeper ECB points towards September overhaul

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  • Uneventful ECB meeting shifts focus to chances of action in September
  • EURUSD rangebound following the Thursday ECB meeting
  • Reports of enormous Japan stimulus plans fail to trigger deeper yen selling
  • Asian stock markets broadly lower
  • Kiwi dollar selling lets up after battering

From the Floor banner
By John Acher

Asian stock markets fell on Friday, and the euro remained rangebound following a distinct absence of fireworks from the European Central Bank's policy meeting on Thursday, which nonetheless raised stakes for a policy overhaul in September.

”The ECB was definitely a sleeper," says Saxo Bank's FX strategy chief John J Hardy. "There was almost nothing priced in, and the ECB managed to deliver very little, and even managed to keep EURUSD more or less in the range, which is quite a feat considering how tight the range has been lately."

EURUSD tried to rally after the ECB's announcement on Thursday, as some expectations were possibly a bit more dovish than what the meeting delivered, and then ECB came up "totally empty handed", Hardy says. 

"But it’s pretty clear they are looking at a potentially major overhaul at the September meeting," Hardy says, citing the ECB's wording on how it will look at policy once it has the latest economic assessments.

”So this raises the stakes for the September meeting, and there was the general comment that risks are tilted to the downside,” Hardy says.

Draghi seemed quite determined yesterday not to send any clear policy signals,”therefore there’s very little to go on this time around,” Hardy adds.

Yen selling stalls

The latest reports from Japan, this time from Nikkei, are that the next Japanese stimulus package could be even more mammoth than reported earlier, with a figure now of JPY 30 trillion floated. But that failed to inspire much yen selling.

”What we are seeing is failure to get interested in the latest noises,” Hardy says. ”USDJPY is not reacting, and I think that points to high risk of consolidation in yen crosses, the yen heading stronger.”

USDJPY almost managed to touch the Ichimoku Cloud level, Hardy says, adding that it could be headed next to basic Fibonacci levels.

USDJPY off highs
Source: Saxo Bank 

In the Asian session, the weakness in the New Zealand dollar showed signs of letting up.

”We see the kiwi stemming its declines this morning after falling for about seven consecutive days. We believe this may be a short-term move due to short covering, and we will be looking to sell the kiwi on rallies,” says Saxo Bank trader Edmund Liu, speaking from the bank’s Singapore hub.

”[Asian] Equity markets were broadly lower this morning, as the dollar-yen declined from a high of 107.50 yesterday on waning expectations of radical monetary policy easing from the Bank of Japan next week,” Liu says.

"Peace time, war time"

Core European bonds were only little moved on Thursday by the ECB meeting. But peripheral European bonds got a boost from Draghi’s remarks at the news conference as he assured markets that a public backstop would be possible when he was asked specifically about Italian banking problems.

”It goes to show that there are a lot of rules and regulations with a lot of good intentions in place, which are all made in ’peace time’, but when we get to ’war time’, all of these rules are pretty flexible after all,” Saxo Bank fixed-income trader Michael Boye says. "So, quite a boost to peripheral assets."

Italian bonds outperformed and Spain was even stronger, with the 10-year Spanish yield hitting an all-time low.

Italian and Spanish 10-year yields drop
Spain and Italy yields fall

Source: Bloomberg

Flash PMIs from Europe will be examined closely today as the freshest measures of the European economy post-Brexit.

Fragile economy

Leading indicators for the US economy turned higher for June, bouncing back from May lows, but still the lowest in six years on a year-on-year basis, and the Conference Board expects low 2% growth in the US over the coming year, notes Saxo Bank's equities strategy chief Peter Garnry.
”That’s very moderate. The bounce back in leading indicators for June in the US was driven primarily by financial conditions, which are under the influence of the central bank, but also a slight improvement in jobless claims and building permits,” Garnry says.

”We still have a very fragile economy that is very sensitive to shocks, in my opinion. So, as a result, I will reiterate that I still think that put options on the S&P 500 are a bargain at current prices,” Garnry says.

Contrarian stocks

Budget airline Ryanair and German travel group TUI are two stocks that have plunged over fears of an impact on tourism from worries about terrorism, and the drop looks like an overreaction and has taken the share prices down to attractive levels, Garnry says.
”They offer interesting upside potential,” he says. ”They are excellent contrarian bets over the coming year.”

Ryanair managed to increase operating income and revenue throughout the European crisis by stealing market share from competitors. ”We think they can continue to do that even in a low-growth environment over the next year, maybe even two years,” Garnry says.

Similarly, TUI also managed to increase income through the crisis years of 2011 and 2012 when there was negative growth in Europe.

”Those two stocks are very interesting and should be looked for,” Garnry says.

Ryanair share looking attractive with rebound potential

Ryanair share price
Source: Saxo Bank
Ryanair is due to report quarterly results on Monday. "So if you want exposure [to the earnings], you have to do it today," Garnry says.

US coffeeshop chain Starbucks missed revenue expectations as its domestic market slows down. 

”They are not seeing enough pick-up in their international markets. They are trying to widen their net to more and more categories to ignite some more revenue growth, but it is still coming down,” Garnry says, adding that Saxo Bank would close a long position in Starbucks. 

"There is no catalyst in the long term," he says.
Earnings reports due on Friday include industrial conglomerates General Electric and Honeywell, Valeant Pharmaceuticals, American Airlines and Moody’s.
Mario Draghi
 The ECB president seemed determined not to give any clear new policy signals. Photo: screengrab from ECB webcast news conference on July 22

John Acher is a consulting editor at

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