Market movers today
From all of us at Danske Bank research, we wish you a happy and prosperous new year.
Today is rather slow in terms of economic releases while we wait for key economic indicators on Friday such as the US labour market report and the euro area inflation prints.
Focus today will be on the recent volatile equity developments as markets come to the new year with 'fresh eyes', amid the US government shutdown and a new issuance season from European governments. See also, Strategy: EGB supply and ECB reinvestment outlook for 2019 - gross issuance set to increase, but with limited issuance of ultra-long bonds.
Selected market news
After a brutal 2018 for equity markets, Asian stock markets begin the new year in the red with the publication of weak economic figures from China. US equity futures are trading in the red as well.
U.S. President Donald Trump is attempting to break the budget deadlock by inviting leaders from both parties to make a deal. The government has been in partial shutdown for 11 days as Trump remains adamant about securing funding for his wall, which was a key electoral pledge. The democrats will assume a majority in the House of Representatives and their leader, Nancy Pelosi, deems the wall "immoral".
Trump responded to North Korean leader Kim Jong Un. He tweeted "I also look forward to meeting with Chairman Kim," in response to threats uttered in a televised speech by the Chairman about North Korea taking "a new path" if economic sanctions are not eased.
Year-end speeches from global leaders, such as China's President Xi Jinping and Italian President Sergio Mattarella, highlighted key 2019 market themes, namely global economic slowdown and political risk .
China's President Xi Jinping stressed self-reliance in his new year's speech as the country faces economic slowdown and US trade belligerence. China's Caixin PMI was published this morning, yielding further confirmation of China's economic slowdown. The index fell more than analysts expected to 49.7 in December from 50.2 in November. The official manufacturing PMI published on Monday also broke through the critical 50 level, corroborating a slowdown.
Italy's President Sergio Mattarella used his speech to chastise Deputy Prime Ministers Matteo Salvini and Luigi Di Maio about driving through a budget piling on more debt on an already highly indebted country. He also voiced his hope for a "serene climate" as European elections approach. European parliament elections in May will take on an added impetus with the recent string of populist victories in Italy and Germany.
Scandi markets
The focus today will be on PMI figures across Scandinavia. While in Denmark, Norway and Sweden PMIs have stayed firmly above 50.0, we could see a marginal slide in December figures for all three economies.
Fixed income markets
The European bond market ended 2018 on a positive note with Bunds trading just above 20bp and the 10Y yield spread between Italy and Germany at 250bp. The Italian parliament passed the new budget, where the deficit for 2019 is 2.04% of GDP. Hence, looking at the year-end auctions from the Italian Debt Office, there was strong demand as the bid-to-cover for 10Y BTPS was at its highest level for 2018. A strong year-end auction typically bodes well for the start of January.
January marks the start of the new issuance season and 2019 should be no different from previous years. We expect a string of issuers to come to the market, as discussed in our 2019 EGB supply and ECB reinvestment outlook. See more in Fixed Income Strategy: guide to Q1 issuance and thoughts on supply in 2019, 1 January.
Spain will do the first tap auction on Thursday, 3 January. Spain will sell between EUR4bn and EUR5bn in 3Y, 5Y, 10Y nominals and EUR0.25bn to EUR0.75bn in the 15Y linker. France is also set to do a tap auction on Thursday. This will be in the 10Y to 30Y area according to the supply announcement from the French Debt Agency made before Christmas.
There is a large reinvestment need in the Danish mortgage market given the redemptions and coupons from the mortgage market due today. Hence, we expect a solid performance in Danish mortgage bonds relative to DGBs in the first weeks of 2019. Furthermore, as 10Y JGBs are trading below 0% and the hedge cost for Japanese investors buying USDdenominated bonds is still very expensive, we expect to see demand from Japan investors in 2019 also.
FX markets
2019 kicks off with a short and relatively quiet week for the G4 FX segment, where the main focus will be on the US jobs report due on Friday. Given the relatively dovish pricing of Fed hikes in 2019, the balance of risk is probably skewed towards a stronger USD on the jobs report, although our expectations for wage growth and nonfarm payrolls are close to consensus expectations. The JPY has continued to strengthen on the back of weak risk appetite and on Monday, 31 December the USD/JPY broke below 110 for the first time since August 2018. Indeed, year-end short covering may have boosted JPY support ahead of New Year, and while risk sentiment is likely to remain the key driver for the USD/JPY, the cross could gain support near term if new JPY shorts are established when investors return from their holidays.
According to the media, support for a second Brexit referendum is growing – especially among Labour Party members and Labour Party leader Jeremy Corbyn could be forced eventually to support a second referendum. The prospect of a second referendum is positive for the GBP and the EUR/GBP is likely to remain boxed in a 0.88-0.9050 range near term until we get further Brexit clarifications. The UK House of Commons returns from Christmas recess on Monday, 7 January and the House may vote on Theresa May’s Brexit proposal in the week starting 14 January.
In the Scandies, EUR/NOK went through some very volatile Christmas trading sessions with the cross spiking above 10.00 several times and then suddenly moving sharply lower again ahead of the New Year. Year-end liquidity was again extremely thin and the domestic data calendar brought limited news. Retail sales rebounded nicely in November as expected, but as with the rest of Scandinavia, the seasonal adjustment has difficulties capturing the rising importance of Black Friday. Going forward, we expect the EUR/NOK to move lower on relative growth, an underpriced Norges Bank, tighter structural NOK liquidity, improved risk sentiment and a higher oil price. Also, Norges Bank will now return to the market buying NOK as part of the fiscal purchases, which brings a psychological NOK support element to the market. We are long NOK/SEK spot and short EUR/NOK via options.
