Market movers today
In the UK, focus remains on Brexit after PM May's intervention yesterday evening. It would be positive for sentiment if May and Corbyn could find common ground but we still cannot rule out a no deal Brexit at this point, although we remain optimistic that the politicians want to go a long way to avoid that.
In Europe, retail sales in February are due out at 11:00 CEST. Given the weakness in Europe lately, it feels like every data release is important. Our base case is still that we should soon see improvement in Europe. In Norway, we get house price data.
In the US, we are looking forward to the release of the ISM non-manufacturing index for March, which is a better indicator of GDP growth than ISM manufacturing. Based on the ISM indices, US growth was decent in Q1. ADP (NASDAQ:ADP) employment is due out at 14:15 CEST. We also have plenty of Fed speakers today.
Selected market news
Global growth optimism continued in the European equity markets. However, noteworthy the European bond market remained supported throughout the day as Brexit fears dominated before PM Theresa May's Brexit intervention in the evening. Overnight risk appetite got a new boost with media (FT) reports that the US and China are about to finalise a trade deal and as Brexit news removed fears of an imminent hard Brexit. Asian equities are higher and 10Y Treasury yields are back 2.5%.
Yesterday, PM Theresa May said she wants to find common ground on Brexit with Labour leader Jeremy Corbyn, which is quite unusual in the UK given the old two-party system. A way forward could involve accepting a permanent customs union, something which Labour has advocated for a long time while May has objected (and the proposal was only three votes from reaching a majority in Monday's indicative vote), but it is definitely not without risk for May, as it may split her party in two. When analysing Brexit, it is important to remember that it is also about history - May probably would not want to be the prime minister getting the UK out of the EU without a deal, as it may have a long-lasting damaging impact on the UK, economically and politically. May, if her words can be trusted, finally decided country was above party. The hard Brexiteers are clearly upset and may even vote against the government in a no confidence vote if May finalises Brexit with Corbyn, so any agreement would involve Corbyn accepting no snap election until after the withdrawal. Any plan must also be built on the Withdrawal Agreement, which will upset the supporting party, the DUP. The Brexiteers and the DUP also have some thinking to do, as Brexiteers have to support May's deal to avoid a softer Brexit and the DUP risks losing power after May reached out to Corbyn.
For now, we stick to our view that we are heading for a long extension to at least year-end but we have to monitor the development over the next week, ahead of the EU summit on 10 April. May also said yesterday that she hoped the negotiations could be sorted out quickly (there is talk the government aims within the next three days) so the UK only needs the short extension to 22 May still. Overall, yesterday's development was positive, as it indicates the risk of a no deal Brexit remains low, but not negligible.
Scandi markets
In Norway, the housing market is still well balanced, which means we basically expect house prices to be essentially flat in March after a surprisingly strong start to the year. However, data from OBOS showed housing prices (n.s.a.) rose 2% in March, implying a considerable upside risk to our estimate.
Fixed income markets
Today, all eyes will again be on the ongoing Brexit saga. The decision by PM Theresa May last night to hold cross-party talks and ask the EU for an extension sets the agenda. Even though this will upset many Conservatives, it removes some of the imminent fears of a hard Brexit on 12 April, and together with the FT story that a US-China deal is drawing closer might put Bunds under some pressure this morning. But as we said yesterday, we are unlikely to see a sustained Bund sell-off as long as the Euro zone data remains weak, core inflation remains very low and the ECB remains very concerned/dovish. The periphery should be able to perform given the improved risk appetite.
In Denmark, it is again time for taps in the 5Y and 10Y benchmark bonds. Danish fixed income remains supported by the drop in duration in the callable mortgage market and an expected jump in excess liquidity in the coming two weeks. Despite the recent performance, we see room for even tighter spreads vs Germany. For more see FI Strategy Denmark, 1 April 2019.
FX markets
In our view, the remaining three-quarter turns in EUR/USD FX forwards are trading at fairto- cheap levels at the moment. For example, if year-end basis widens to the past year’s extreme levels, it would amount to an 8-14bp increase in the 1Y EUR/USD FX forward – see FX Strategy EUR/USD FX forwards: one down, three quarter turns to go, 2 April 2019. In addition, we note that the market has found some comfort in recent US data, which has slowly started to push short-term US rates higher and EUR/USD lower. In that respect, the line-up of Fed speakers today will be key to follow.
In the Scandies, EUR/SEK tested 10.40 after solid PMI data for the manufacturing sector, but failed to break and is back in the 10.40-10.50 range. We expect to stay here ahead of next week’s (11 April) inflation figures and expect no significant reaction on the PMI services data today.
For quite some time, house prices from Real Estate Norway have not been a market mover for the NOK. Meanwhile, with Monday’s surprisingly strong OBOS data, we might be in for a change should the housing market continue to surprise to the topside. We are still pencilling in further upside in NOK/SEK and downside in EUR/NOK over the coming months.
EUR/GBP moved to the lower end of the 0.85-0.87 range after PM Theresa May’s statement yesterday evening. For now, we expect EUR/GBP to stay above 0.85, but if the negotiations are successful and May and Corbyn can find common ground, we could soon see a move below 0.85. However, this is easier said than done. When a deal is agreed upon, we expect EUR/GBP to move down to 0.83. In case of no deal Brexit, we expect a move towards parity. A long extension would also be slightly GBP-positive and we could see EUR/GBP trade in the 0.84-0.86 range.
