Saxo Morning Call

Will dovish Draghi downplay the ECB's normalisation path?

Michael McKenna
Head of Editorial Content, Saxo Bank

"Back and forth" is Saxo Bank head of equity strategy Peter Garnry's broad take on markets as we continue trading within a range set between January's highs and February's lows. APAC markets caught an updraught overnight on the apparent softening of US president Donald Trump's stance on tariffs, reports Saxo FX head John Hardy, although potential exemptions for trade partners such as Canada and Mexico risk making the entire effort appear a much more pointed blow against China.

"We have already seen a Chinese minister out stating that the US plans will hurt all parties involved, as well as noting the potential for retaliatory measures," says Hardy.

Today's key event risk is the European Central Bank meeting and press conference at 13:30 GMT with Hardy reporting that ECB president Mario Draghi may attempt to undue some measure of investor confidence in the bank's policy normalisation path.

"The ECB will come out dovish," says Garnry, adding that European equities are still preferred over bonds. Saxo's equities head, however, does note some risks on the sentiment front pointing to surveys that show private investors to be at their least bullish since August 2017.

"[It's important to] remain defensive as volatility looks likely to remain elevated; our dynamic asset allocation has 22.7% exposure to equities," notes Garnry.


In FX markets, the JPY rose overnight on a strong GDP revision out of Tokyo while the loonie caught a bid on the seeming withdrawal of the US tariffs threat even as the Bank of Canada waxed dovish Wednesday.

In commodities, crude oil rallied in the immediate wake of the latest Energy Information Administration report before slumping by 3% on a surprisingly strong US production figure.

In Saxo Bank head of commodity strategy Ole Hansen's view, the risks remain skewed to the downside for oil with an elevated hedge fund long as well as the long/short ratio being key concerns in light of the US shale rebound.

"I doubt much will change in funds outlook so long as $57.50/barrel holds in WTI and $61/b holds in Brent," says Hansen, who nonetheless cautions that Chinese demand for a raft of key commodities from oil to iron ore slumped lower in February.

Beyond crude oil, Hansen reports that he remains bullish gold due to its strong diversification credentials but points to the March 21 Federal Open Market Committee outing as a potential risk, particularly if any acceleration of the Fed's rate hike plans drive USD short-covering.


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