ECB: Draghi to Disappoint

Thursday September 8: Five things the markets are talking about

Today is D-day for the European Central Bank (ECB).

Market consensus does not expect euro policy makers to deliver a new round of stimulus this morning. Nevertheless, officials are expected to release a new raft of economic forecasts, which should help provide the market with further clues on how much stimulus the ECB is likely to deliver in the future.

What’s to be said? Don’t be surprised if officials address concerns that the ECB’s bond-buying program is set to run out of assets to buy because of the central bank’s self-imposed rules. What’s to be done? This could include dropping some of those rules or announce an extension of the program beyond its current end-date of March 2017.

Others argue that it is too soon for the ECB to radically revise either its projections or its policies. Tier 1 central banks would have been hoping that the Fed would be doing most of the heavy lifting, however, U.S data over the past week provides further evidence that the Fed may want to remain with its “lower for longer” policy for the time being.

If Draghi and company believe that is so, then its a good bet to expect the ECB to create itself more time to prepare a more thorough medium-term action and communication plan.

1. Global bourses trading mixed

Despite volatility remaining compressed, Asian shares are trading close to their one-year peaks as Chinese trade data topped forecasts, a promising sign for global demand.

China trade surplus narrowed as imports rise for the first time in nearly two-years. Beijing reported imports rose +1.5% in August from a year ago (-4.9% expected), while exports dipped -2.8%. Data like this should reduce expectations of further PBoC easing.

The Nikkei Stock Average fell -0.3% as the yen continued to strengthen against the dollar (¥101.55). Elsewhere, Australia’s S&P/ASX 200 ended down -0.7%, the South Korean Kospi added -0.1%, and Singapore’s Straits Times Index was off -0.4%.

European equity indices are trading mixed ahead of the ECB policy meeting this morning. Financial stocks are leading the gains across the Eurostoxx, while commodity and mining stocks are supporting the FTSE 100.

Indices: Stoxx50 flat at 3,091, FTSE +0.5% at 6,879, DAX -0.1% at 10,739, CAC-40 flat at 4,557, IBEX-35 +0.7% at 9,079, FTSE MIB +0.1% at 17,308, SMI +0.2% at 8,338, S&P 500 Futures +0.1%

2. Oil extends gains after big U.S. crude stock draw

OPEC meetings aside, crude prices are receiving temporary support from two sources – China trade data (see above) and weather conditions.

Crude oil prices have rallied overnight, rising +1.5% after U.S. industry data showed a large drawdown in crude stocks (API data: -12.1m vs. +0.2m expected), reflecting the temporary impact of tropical storm Hermine.

Brent crude oil is trading up +80c a barrel at $48.78, after settling up +72c on Wednesday. WTI is up +90c at $46.40 a barrel, having ended the previous session up +67c.

On Monday, oil printed a weekly high after Russia and Saudi Arabia agreed to cooperate on stabilizing the oil market. Nonetheless, the markets uncertainty over a possible deal by OPEC later this month (Sept. 26-28) to freeze output continues to cap extensive price moves higher.

Metals are trading mixed ahead of the ECB announcement. Gold is trading higher (up +0.2% at $1,347.01 an ounce) on the back of a weaker USD. Both silver (+0.6% at $19.87) and platinum (+0.6% to $1090.95) are off their three and two-week highs recorded yesterday.

3. Yield curves flatten as investors seek a return

In the U.S, a softer non-farm payroll (NFP) print and a disappointing ISM non-manufacturing PMI report this week has many pricing out the possibility of a Fed hike later this month. Fed fund futures are showing a +15% chance of a rate hike. U.S 10’s have backed off from their high pre payroll (+1.604%) to currently yield +1.535%.

Elsewhere, the PBoC seems to be tightening liquidity in the offshore market (HK overnight rate for yuan loans have jumped from +3.88% to +5.45%). Chinese authorities did this last January to try and ward off “short” yuan speculation.

Expect Europe money markets to take their cues from President Draghi’s press conference at 08:30 EDT.

4. G7 currencies contained for now

Is it the calm before the storm? FX markets are quiet in Europe as the markets eye this morning’s ECB announcement.

Dealers seem convinced that the ECB will keep its overall policy steady while Draghi will paint a dovish picture during the press conference. Nevertheless, the EUR (€1.1279) is drifting towards the psychological €1.13 handle on the view the ECB can do little to cause the single unit to weaken.

The Aussie is trading atop of its three- week high above A$0.7700 after China trade components showed improvements.

Sterling is trading higher outright, up +0.2% at £1.3361, as investors continue to scale back expectations for a Fed hike later this month. The pounds next move really depends on the markets view of the Bank of England (BoE) – many still see another interest rate cut by Governor Carney later this year as possible, and remain concerned about uncertainties following the Brexit referendum vote. This should limit the pounds move higher.

5. Bank of Canada (BoC)

The BoC held its key interest rate (+0.5%) steady yesterday, saying it continues to anticipate a strong rebound in H2 despite a disappointing Q2. The central bank said the resumption of oil production and rebuilding in fire-affected Alberta is expected to contribute to a rebound in Q3.

In the BoC’s communiqué, Governor Poloz warned that risks to the inflation profile had tilted “somewhat to the downside” from earlier expectations and exports had disappointed in recent months. This is being interpreted by a few as slightly “dovish” and could possibly keep the door ajar for a possible rate cut next month.

However, despite the Governor remaining frustrated with non-energy exports and because of the “hot” housing market the BoC may not have the latitude to cut rates anytime soon.

The futures market is currently pricing in a “cut” in H1 2017 when the country’s housing sector is anticipated to be a tad softer.

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