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From the Floor: Bonds close in on post-Brexit highs
#SaxoStrats
27 October 2016 at 7:11 GMT
Video / 08 December 2016 at 8:12 GMT

From the Floor: ECB gets ready to apply the balm — #SaxoStrats

#SaxoStrats
   • ECB meets this afternoon as Italy remains on the agenda
   • Consensus is ECB will extend bond-buying programme six months — Hardy
   • Anything less than that will be taken as hawkish by market — Hardy
   • Health stocks feel the heat as Trump takes aim — Garnry
   • Post-Trump victory rally based on hope he would leave sector alone — Garnry
   • Oil slips below $50/barrel as pressure mounts on Opec deal delivery — Hansen
   • Gold battle at $1,172/oz continues with little sign of resolution — Hansen
   • Surprisingly strong Chinese trade data helps keep equities buoyed — Moltke-Leth

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By Martin O’Rourke

Draghi's path

European Central Bank president Mario Draghi must have been dreading this one week ago. His compatriots looked all set to deliver a verdict in his homeland that would have Brussels quaking and threaten once again the viability of the whole European project.

And yet, negative referendum result duly delivered, the ECB chief is probably in for an easier ride this afternoon than he could have possibly anticipated. 

“The Italy situation with the banks is ongoing,” says Peter Garnry, head of equities strategy at Saxo Bank. “But the Italian Treasury’s move to put together an indirect rescue of third-largest bank Monte dei Paschi has removed a lot of the tail risk.“

That has also helped the forward momentum in the global equities rally which is in part being fueled by the likelihood that Draghi will greenlight an extension of the bank’s €80 billion/month bond-buying programme and sooth market nerves in the process.

”The consensus is for a six-month extension in the QE buying programme,” says Saxo Bank’s head of forex strategy John J Hardy. “Anything less that would be taken as hawkish by the market.”

Hardy also anticipates “some kind of message” on a possible taper of the €80bn/month purchase programme and warns of the possibility, albeit slight, of a “wildcard” move although “the expectations are low for something like that.”

EURUSD could face a move higher depending on what comes out of the meeting with 1.10 potentially on the horizon, although Hardy struggles to think this can be sustainable.

“We could certainly push up through resistance and perhaps even touch 1.10 but I have a hard time seeing EURUSD moving into a major trend change here,” he says. “We need to stay below 1.10 to show that we are still in a bear market.”

EURUSD could test 1.10
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Source. SaxoTraderGO

USDJPY meanwhile continues to bubble along at just below 114.0 with an Ichimoku Cloud potentially indicating a rise to 115.00/50. The Nikkei will not be complaining, however, having jumped 1.45% on the day on the back of the boost to exports from a lower yen.

Health scare

As lists go, the spectre of a Hillary Clinton presidency would have loomed large on any self-respecting healthcare stock in the US, evidenced by the rally that set in once Donald Trump’s victory was confirmed.

That buoyancy now looks premature. Global equities may be on the up and the Dow’s assault on 20,000 could become reality, but Trump took clear and decisive aim at the healthcare sector and reform looks likely.

“After Trump’s victory, there was a big rally, but it looks like the markets got this wrong,” says Garnry. “Trump is taking aim and it is clear now that Clinton was not the only one who is negative on the healthcare sector.”

“There has been a squeeze on the middle class.”

Glum Opec

One week ago, Opec was jubilant after cutting a deal on oil that not only caught analysts on the hop, but helped spur a rally that threatened the 2016 highs.

A week on, and grim reality has hit home as the actual mechanics of getting the deal over the line in terms of delivery look ever more problematic.

“Crude oil is back below $50/barrel and there is a growing doubt over the non-Opec commitment to a 600,000 barrels/day cut,” says Saxo Bank’s head of commodities strategy Ole Hansen. “WTI has at least managed to find support at $49.50/b.”

WTI was at $49.78/b at 0755 GMT.

There are a myriad of issues facing Opec’s deal on the supply side with Nigeria, for example, expecting to increase production in January to 2.1 million b/d from November’s 1.7m b/d, more than wiping out the Russian commitment on the Vienna deal.

There was also a surge in oil inventories at Cushing and the 2016 average continues to outstrip the five-year average by some 20m.

Oil inventories in 2016 way above the five-year average
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Source: Bloomberg, DoE, Saxo

Gold meanwhile has found some support on the back of a slightly weaker dollar and lower real yields, says Hansen. “Ten-year real yields are back below 40 basis points in the US, the lowest for a couple of weeks. Gold is still hovering around the $1,172/oz level.”

“Gold options traders meanwhile are more back to neutral now compared to two weeks ago which is a more neutral position and ties in with the stabilization of the market that we are seeing now,” says the commodities chief.

And finally…

China’s trade data was unexpectedly strong overnight as CNH weakness helped stimulate an exports push backed up by signs of better things in the domestic economy, says Christoper Moltke-Leth from the Singapore desk.

“The devaluation of the yuan since last year is benefiting but in the background, we have this potential looming trade war with the US as Donald Trump turns his focus and there is also the concern on how China is burning through its reserves,” says Moltke-Leth.

draghi

Over to you Mario! 

Martin O’Rourke is managing editor at Saxo Bank

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