Market movers today
A quiet day on the data front, but markets will keep an eye on the Brexit headlines.
Italian markets already sold off yesterday, after the European Commission slashed its annual growth forecast for the country to just 0.2%, bringing back concerns about a resumption of last autumn's budget fight. To feed the gloom, today's Italian industrial production figures for December are unlikely to lift investors mood on the economy, which contracted by -0.2% q/q in Q4.
In Scandinavia, we get Norwegian Q4 18 GDP figures and Danish foreign trade data for December. We
Selected market news
Overnight Trump said that he has no plans to meet with Xi Jinping before the 1 March deadline and the end of the 90-day truce on higher tariffs. Hence, the trade war fears are now returning to the market.
Yesterday, the EU Commission released new rather gloomy 2019 winter forecasts. Euro area growth for 2019 was revised down to 1.3% from previously 1.9%. The growth forecasts for Germany was lowered from 1.8% to 1.1%. The EU Commission slashed its 2019 euro area inflation forecast to 1.4%, down from previously 1.8%.
Noteworthy, the growth for Italy was lowered to just 0.2% in 2019 from previously 1.2%. This is well below the assumption in the 2019 budget and further questions the budget deficit assumptions by the Italian government and it could restart the budget fight with the EU. Remember, the EU and Italy agreed on a 2.04% deficit in December. The market reacted negatively to the news and the 10Y Italian spread vs Germany widened almost 15bp. 10Y Bund yields dropped to the lowest level since 2016.
We should expect that also the ECB will present lower growth forecasts when the staff projections are updated next month. It could further trigger market speculations of new easing/postponing of tightening from the ECB.
In light of the gloomy EU commission outlook it is quite important that we now see tentative signs of a bottom in the Chinese business cycle in Q1. Metal prices are up, PMI for large enterprises rebounded in January and export orders also off the lows - see more in China Leading Indicators - First signs of a bottom , 7 February.
As expected, the Bank of England (BoE) yesterday voted unanimously to keep the Bank Rate at 0.75%. BoE lowered both its GDP and CPI inflation projections, but made no big policy signal shifts though it even more strongly highlight the economic growth risks from Brexit.
The poor risk sentiment from Europe was carried over to the US and the major US indices ended the day roughly 1% lower and US Treasury yields dropped further and 10Y US yields are now at 2.65%. Asian markets are also in red.
Scandi markets
In Norway, we expect the Q4 GDP figures to confirm our assumption that the slowdown in Q3 was only temporary. Despite weak consumption, we expect mainland GDP to grow 0.9% q/q in Q4, driven by increases in oil investment, mainland investment, government investment and, to a degree, housing investment. All recent news and data, including confidence surveys and anecdotal information, support our expectation of a relatively strong upswing in industrial production despite the downturn in the global manufacturing climate. The investment surveys for both the business and government sectors show considerable infrastructure investments on the way. If we are right in our forecast, growth will be above trend in an economy already hitting full capacity utilisation. It will also be somewhat higher than Norges Bank projected in the December monetary policy report (0.7%) and so would point clearly to a further rate increase in March.
Fixed income markets
Today, we have {IR}Ireland and {GR}Greece up for a rating review. We do not expect a change to either the rating or the outlook for either country.
The non-callable auctions in Denmark continue today, and in general there has been ample demand to snap up supply at the auctions and Spreads to swaps have tightened. This is the last day for the auctions and we have to wait until May before we have another auction in the non-callables and floaters.
RD will sell DKK9.1bn (1Y: 5.1bn, 3Y: 2.1bn and 5Y: 1.9bn) in non-government guaranteed SDO bonds, Jyske Realkredit will sell DKK3bn in government guaranteed bonds and Nykredit will be sell DKK13.5bn in a Apr-23 RO(G) 6M CIBOR floater bond.
Yesterday, we published our bi-weekly on the Danish market, where we recommend a flattening strategy on the front end of the Danish government curve as well as looking at the seasonality in the long end of the DGB curve. See more here Reading the Markets Denmark - Buy DGB 11/20 vs. DGB 11/19 in a box against Bunds, 7 February.
FX markets
The Scandies stay under pressure with EUR/SEK close to the 10.50 mark yesterday, dragging EUR/NOK along with it. Sour risk appetite and a drop in oil prices contributed to the move in NOK. We do, however, expect a strong GDP release today and if global risk stabilises we would expect EUR/NOK to return to the 9.60s with the coming sessions.
Not much have gone the SEK’s way at the start of this year. While we have already pointed at surprisingly weak macro data and revised growth assessments, we would also mention Fed’s and ECB’s signalling of slowing ‘normalisation’ of policy. Another observation is that the SEK is acting more like a funding currency in carry trades with the extremely low implicit volatility offering good conditions for such positions. Separately, EUR/DKK briefly touched 7.4630 yesterday – the lowest level since mid-December. In our view, a main driver of the recent DKK strength has been spill over from rising equity markets. We think it has further to go and forecast EUR/DKK to fall to 7.4600 in 3M (NYSE:MMM) and 7.4550 in 6-12M.
In majors, EUR/USD touched new February lows before stabilising around 1.1350 yesterday. USD continues to strengthen despite Fed’s soft tone and trade-deal optimism but this seems to be more about weakness elsewhere including on the cyclical side in Europe.
We still the cross range-bound with 1.15 the attractor. GBP quickly recovered from the initial knee-jerk sell-off after the BoE announcement and continued to rally on the message that markets should prepare for further rate hikes in the UK. We still expect the BoE to hike in November 2019 whereas the market is pricing the next hike for June 2021. But with the Brexit issue prominent near term, we still look for EUR/GBP to remain in the 0.86-0.89 for now. We maintain the view that it will require further reduction in the ‘no deal’ Brexit risk for EUR/GBP to test and eventually break below 0.86. Appetite for GBP is likely to deteriorate as 26 February approaches without any signs of an agreement between the EU and UK.
