Market movers today
Focus continues to be on news on the US-China trade front as we close in on a deal and meeting between US President Donald Trump and Chinese President Xi Jinping. When we get a date for the summit between the two it should be clear a deal will be made.
The National People's Congress in China that kicked off overnight will also be watched for any announcements on new stimulus and signs on the reform side. Some first hints regarding this overnight; see below.
On the data front, we have service PMI and retail sales out of the euro area and ISM non-manufacturing and new home sales in the US. The service sector has generally held up well lately whereas the weak link globally has been the manufacturing sector.
In Sweden, it's time for service PMI, industrial orders and our own home price indicator (tenant-owned flats in Stockholm), see page 2.
Selected market news
Risk sentiment was weighed down by Chinese announcements of lower growth targets despite new stimulus overnight (see below). Overnight, the Reserve Bank of Australia (RBA) kept its cash target rate unchanged at 1.50% as widely expected. The policy rate has been unchanged for the past three years as Chinese deceleration and a weak property market are taking their toll on the Australian economy. Meanwhile, whereas the Japanese services PMI rose to 52.3 (from 51.6), the Chinese Caixin PMI fell to 51.1 (from 53.6), which was somewhat weaker than expected (53.5). This further helped dampen risk appetite.
Equities posted losses in both the US and Asian sessions, with the Dow Jones industrial down close to 0.8% while the Nikkei was 0.6% lower on the day, at the time of writing. The USD has continued to strengthen with EUR/USD below 1.1350, even if the uptick in US yields over the past week came to a halt with the 10Y Treasury yield closing around 2.72%. Brent crude oil steady around USD65.50/bbl while copper prices - a good indicator of Chinese sentiment - recovered a tad.
Ahead of the National People's Congress, Chinese premier Li made a series of announcements overnight. First, the Chinese authorities released new GDP growth targets, which were lowered to the 6.0-6.5% range for 2019 (vs 6.5% for 2018), i.e. accommodating a continued deceleration in growth. At the same time, it was also underlined that 'prudent' monetary policy and 'proactive, stronger, and more effective 'fiscal policy will be pursued going forward with a target budget deficit of 2.8% of GDP (vs 2.6% last year). Further, VAT cuts were announced and significant tax relief was pledged for the industrial sector with tax and social security fees set to be reduced by CNY2tr. On the whole, this suggests that China is preparing for a continued slowdown in growth, but also that the Chinese authorities remain ready to stimulate to avoid a hard landing, even with a trade deal in sight.
Scandi markets
Norway. Housing prices have risen further than expected for the past couple of months. We are also seeing turnover holding up well enough for the stock of unsold properties to fall. The market therefore seems to be reasonably balanced, and we expect prices to be unchanged or creep up only slightly in January.
Sweden. Services PMI and the new composite index are due, with the latter first published last month (at 53.3). The manufacturing PMI released last week showed a small increase (to 52.5 from 51.7). Considering that services account for 72% of the composite index, a higher reading would depend on how the services-PMI behaves this time around. Much of the international debate is around signs of a global slowdown in manufacturing, and in Sweden, services producers appear to be equally concerned. This is illustrated in the latest NIER business confidence report, where services confidence continued to slide below the key 100 level. Further, Danske Bank publishes its own home-price indicator (tenant-owned flats in Stockholm) for February at 08:00 CET.
Fixed income markets
Global yields dropped yesterday as global equity markets came under pressure and the US yield curve 2s10s bull-flattened. The poor risk appetite weighed on Italy, where the 10Y segment widened 3bp vs bunds. Portugal and Spain traded flat vs Bunds. Today, the market will focus on the new 10Y Greek EUR benchmark bond that is to be sold today (subject to market conditions) in a syndicated deal. Despite the somewhat weaker risk appetite, we look for strong demand for the “high-yielding” Greek bond. It would underline that the periphery rally of 2019 still has further to go. The deal comes after Moody’s lifted the rating of Greece by two notches to B1 (stable outlook) on Friday. Greece attracted bids for more than EUR10bn when it sold EUR2.5bn in a 5Y benchmark bond in late January. Austria will also be in the market with its usual double-tap: this time with the first tap in the new 10Y (Feb-29) bond and a tap in the 20Y benchmark bond Feb-47. Finally, the German Finanzagentur will tap EUR0.75bn in the Apr-26 linker. German 10Y break-evens have moved almost 10bp higher over the past three trading days, though still below 1%.
FX markets
Among the majors, EUR crosses lost some of the upward momentum that has been in place over the past week on political developments. A slide in EUR/USD was not least driven by a bout of USD strength, with the greenback turning its back on Trump – possibly in a somewhat delayed reaction to the uptick in US yields towards the end of last week. We stress that while relative economic surprise indices have favoured EUR/USD lately, we think it is too early for a relative cyclical story to take the cross higher, even if a trade deal looks near.
In terms of FX forwards, there are, in our view, good reasons why momentum could be starting to turn for EUR/USD forwards, and we could begin to see a gradual move higher again. These include the potential for a repricing of the Fed, the recent tightening of EUR/USD OIS basis over Q1 and Q2 turns and the resumption of USD liquidity tightening after the debt ceiling kicked in this weekend. Read more in FX Strategy: Momentum could start to turn around for EUR/USD FX forwards.
EUR/Scandies moved higher in tandem yesterday; EUR/SEK just shy of the 10.60 level whereas EUR/NOK broke through 9.80 as Scandi bank shares took a hit. The string of better-than-expected data in Sweden last week has so far only given transitory support to the SEK. Today’s PMI services may take a dive (see above), which if anything, would merely bolster the poor underlying SEK sentiment further.