US markets were closed yesterday but most Asian equity markets gained on the back of speculation that China will ease fiscal policy in order to stimulate growth and despite the problems in the Spanish banking sector.
The euro remains under pressure against major currencies on the back of the events in Spain.
Markets Overnight
Both the Spanish equity and government bond markets suffered significantly yesterday. The Spanish Prime Minister Mariano Rajoy called for a show of force from European authorities to help fund a bailout of the nation’s third-biggest lender, which is in need of more than EUR20bn in recapitalisation. He indicated that this will be funded through public sector securities (i.e. government bonds) rather than seek support from the EU.
The Asian stock market reversed early losses and gained on speculation that China will take steps to boost growth in the world’s second-largest economy; Hang Seng rose 0.3%, while the Australian index rose 1%. A small step was taken yesterday, as the Chinese Ministry of Finance said it will allocate as much as CNY2bn (USD317m) every year to support purchases of energy-efficient cars. Support is needed as the unemployment rate in Japan climbed to 4.6% in April from 4.5% in March, the first increase in three months. Furthermore, South Korean manufacturers’ confidence fell from a nine-month high, according to the Bank of Korea.
In FX markets the events in Spain are putting pressure on the euro against major trading partners. Euro is testing the 1.25-level against the dollar this morning after a short rebound up to 1.26. USD/JPY has been fairly stable at 79.5-level. DKK is again strengthening versus the euro and EUR/DKK is testing the 7.43-level and we could see more central bank intervention as discussed on the next page. SEK and NOK have been stable against EUR at 8.98 and 7.53, respectively.
Global Daily
Focus today: We have a relatively light calendar today, so the market will probably continue to be driven by possible news flow from Greece and Spain and general risk sentiment. Germany will today release preliminary consumer prices for May starting with the first Länder-reports this morning. Inflation probably stayed above 2% but this is unlikely to be a major constraint for a ECB cut soon. In the US consumer confidence is expected to have been largely unchanged in May, as the positive impact from lower gasoline prices has been largely offset by lower stock prices. In the US CaseShiller home prices for March will also be released today in addition to the Dallas Fed’s manufacturing survey for May.
FX Markets: Yesterday we saw some support for the euro as parties supporting the bailout terms are in the lead in Greece. However, the support only lasted for half a day as focus turned to Spain where yields rose once again. We expect the financial jitters to continue this week and it seems that it is only a matter of time before EUR/USD breaks
decisively below 1.25 - we have a 1M target of 1.22 for EUR/USD. Hence, we continue to recommend selling EUR on relief rallies that are expected to occur from time to time given the record number of short EUR/USD positions in place.
We also keep an eye on EUR/CHF. The SNB is considering whether capital controls have to be enacted if the European debt crisis escalates. The rather aggressive rhetoric from the SNB could further fuel focus on the Scandies. Both NOK and DKK are in our view potential currencies that could see accelerated inflow if the crisis escalates. In respect of
DKK it might trigger a new rate cut as early as this week. In respect of NOK, keep an eye on the testimony by governor Olsen today at 12:30 CET. He might comment on the strength of NOK and the consequences of the debt crisis for NOK.
Scandi Daily
In Denmark the government will present its long-awaited proposal for new tax reforms, which will have to be negotiated with the other parties in the parliament, as the government does not have a majority. However, the big event for the market happened last week when the Ministry of Finance lowered the budget deficit for 2012 by some 1.7% of GDP to a deficit of 3.8% of GDP.
EUR/DKK still trades around 7.4310 even after the Danish central bank cut interest rates by 10bp last week. We expect that the current financial stress will continue this week and that the currency safe-haven inflow into DKK will continue as well. Therefore we would not be overly surprised if we see yet another independent rate cut from the Danish central bank this week. However, the Danish central bank might also wait until next week, when rates most likely will have to be changed anyway as we expect the ECB to lower the refirate by 25bp. No matter what, there is little doubt that Danish rates are fast approaching zero and negative rates cannot be ruled out.
Sweden: A lot of Swedish statistics this morning. We look for a small decline in both May manufacturing and consumer confidence on the back of weaker German data and stock market turbulence. There is also April household lending data, which we expect to have continued to slow down. More important, however, is sub-components showing what is happening to mortgage bond supply. Here we expect data to confirm that supply is moderating or even falling in line with the current trend. This should be bullish for Swedish mortgages as we see continued demand from domestic buyers and over the past couple of quarters rising demand from foreign borrowers. Hence, we look for a tighter 5-year mortgage spread.
Norway: A busy week in Norway kicks off today with LFS-unemployment numbers. We expect an unchanged reading of 3.2% underlining that the Norwegian labour market is still very tight. However, more focus will be on the introductory statement at 12:30 CET by governor Olsen at a hearing on the conduct of monetary policy before the Standing Committee on Finance and Economic Affairs of the Storting. Olsen might give some new insight into how Norges Bank views the latest developments in the European debt crisis.
Disclosure
This research report has been prepared by Danske Research, a division of Danske Bank A/S ("Danske Bank").
Analyst certification
Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research an alyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report.
Regulation
Danske Bank is authorized and subject to regulation b y the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request.
The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of th e Danish Securities Dealers Association.
Conflicts of interest
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the research policies of Danske Bank. E mployees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to the Research Management and the Compliance Department. Danske Bank Research Departments are organised independently from and do not report to other business areas within Danske Bank.
Research analysts are remunerated in part based on the over -all profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions.
Financial models and/or methodology used in this research report
Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request.
Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.
Expected updates
Danske Daily is updated on a daily basis.
First date of publication
Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price from the day before publication.
General disclaimer
This research has been prepared by Danske Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a soli citation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ("Relevant Financial Instruments").
The research report has been prepared independently and solely on the basis of publicly available information which Danske Bank considers to be reliable. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness, and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report.
The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgment as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in the research report.
This research report is not intended for retail customers in the United Kingdom or the United States.
This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior written consent.
Disclaimer related to distribution in the United States
This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to "U.S. institutional investors" as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to “U.S. institutional investors.”
Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA, but satisfy the applicable requirements of a non-U.S. jurisdiction.
Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in nonU.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.