Will the ECB show a different hand?

Thursday July 21: Five things the markets are talking about

Nope, not really and that’s the majorities viewpoint. Businesses as usual as Euro policy makers are waiting for more data. However, many believe Euro officials may signal such a move is on the cards at the bank’s September 8th meeting. Expect Draghi to be questioned about Brexit and its potential impact in his press conference at 08:30EDT.

Despite this morning’s natural lull in the market ahead of the ECB interest rate announcement, the good times continue for most equity investors. Global stock indices remain in the ‘black,’ fuelled by a series of data releases underlining the strength of the U.S. economy, corporate earnings and expectations of further central bank action following last month U.K Brexit vote.

Capital markets require conviction for direction. A plethora of central bank announcements over the next few weeks should keep investors on the straight and narrow, starting with today’s ECB and next week’s all-important BoJ’s announcement (July 28/29) where further stimulus is expected. Already BoJ’s Kuroda has disappointed some of the markets risk takers overnight by stating that ‘helicopter money’ is not a possibility.

1. Japan fiscal stimulus tipped to top ¥20T

The event risk for next week’s Bank of Japan (BoJ) meeting is that Japanese policy makers do nothing. There is a small percentage of that actually happening, especially if USD/JPY (¥106.00) continues its stoic rally. The market has been pricing in a BoJ move along with strong fiscal package from PM Abe’s government to “reflate” the nation.

With the super-majority in the upper house of Parliament after the latest elections, it’s rumored that Abe and his cabinet continue to craft a significant fiscal stimulus package. Overnight Japanese press reports now anticipate the fiscal package to reach at least ¥20T – up from over ¥10T forecast after the elections – given that some of the projects will be long term and run into FY17 and beyond. The package is also expected to include at least +¥9T in government spending and fiscal loans.

The one-way directional yen flow was snapped in overnight trading when BoJ Governor Kuroda indicated that “helicopter money” was a no go – USD/JPY has backed off aggressively after taking a nibble at the ¥107.54 to ¥105.72 ahead of the U.S open.

2. The Reserve Bank of New Zealand (RBNZ) signals further easing

Another currency that has that has hogged the limelight in Australasia over the last couple of sessions has been the Kiwi dollar (NZ$0.7000).

Overnight and in their latest assessment of the economy, the RBNZ gave its clearest indication that further policy easing will be required and that a strong NZD is making it very difficult for the policy makers to reach their inflation objectives, particularly given the significant downside risks to global growth. Brexit is the unknown variable and has yet to be proven of its economic impact.

Policy makers tend to hedge and produce a balanced approach, at least until action is required. Therefor, the RBNZ also balanced their concerns of policy becoming too easy with assessment of long-term inflation as “balanced.”

Last week, the RBNZ took probably the last necessary step to remove a barrier towards more easing at next months meet when they expanded its macro LVR restrictions nationwide. The Kiwi property market inflation risks have been the primary impediment to further easing. Currently, some fixed income dealers have started to price in two more moves on rates before the end of 2016, starting with the August 11th meet.

3. Hang Seng in “Bull” territory

Central bank expectations are the major driver behind equities rally; coupled with good earnings this week from U.S bellwethers is keeping that momentum going.

Hong Kong stocks pushed into bull market territory overnight. The Hang Seng Index finished up +0.5%, and has now risen in eight of the past nine trading sessions.

Unlike its European counterparts where financials and commodities have tended to lead the way this week, property stocks have also aided the benchmark’s recent gains (+2.7%). Today’s gains have pushed the Hang Seng Index into positive territory for the year to date. From its low in mid-February, the benchmark is up more than +20%.

Elsewhere in Australasia, the Nikkei closed up +0.8%, Australia’s S&P/ASX 200 was up +0.4% and South Korea’s Kospi slipped -0.2%.

European bourses will want to get a handle on the ECB decision and Draghi’s press conference (0.8:30 EDT) before resuming in any meaningful direction. Nevertheless, they have opened up soft on the back of Kuroda’s comments that “helicopter money” is not forthcoming.

4. Crude’s consolidation

Oil prices have consolidated its gains from yesterday, as the continuous drawdown in U.S. crude stocks seems to be dominating the obvious increase in gasoline stocks.

However, crude’s oversupply is expected to continue its snowball effect, as the “glut” will be processed into a glut of gasoline and other fuels.

Both Brent and WTI crude trade flat in the Euro session at $47.15 and $45.76 a barrel respectively ahead of the open stateside.

Prices got a leg up yesterday after the U.S. Energy Information Administration (EIA) data indicated that crude stockpiles contracted by -2.3m barrels (expected -1.3m). It was the ninth consecutive week for a drawdown. The data also revealed that gasoline stocks grew by +900k barrels last week – this is above the limit of the average range.

Domestic demand in the U.S last week has also been aiding crude prices. Daily demand is again back over +20m barrels per day benchmark.

5. Bonds get a “small” bid

For the risk takers, Kuroda’s disappointing “helicopter” comments is giving some sovereign bonds a push higher. The yield on the U.S 10-years note is +1.574% in Euro trading compared with +1.590% close stateside.

Nevertheless, Treasuries yields continue to remain comfortably above where they stood earlier this month. On July 8th, U.S 10’s closed out the day with a record low yield of +1.366%. The low yield scenario is the markets continued uncertainty about the health of the global economy and the policy course of the Fed. U.S Treasuries in particular remain attractive with a record amount of negative-yield sovereign debt in Japan and Europe.

While investors had all but priced out the chances of an interest-rate increase by the Fed this year after the Brexit vote, the odds that it could act as soon as September have been creeping upward in recent days, following a string of solid U.S. economic reports. Fed funds are pricing in a +20% chance of a September hike and a +40% chance of a December Fed rate move.

The market knows that the Fed wants to tighten, but can it afford too?

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell