Market movers today
- The US market will be closed today due to it being Martin Luther King Day and there are few economic data releases. The main event this week will be the ECB, BoJ and Norges Bank meetings, although neither the ECB or the Bank of Japan are expected to make any changes to their current policy stance.
- In terms of data releases, we are looking forward to the preliminary PMIs for euro area, Japan and the US on Thursday
- Today’s most important event comes from the UK, where PM Theresa May is expected to put forward her Brexit plan B to the House of Commons (the motion is amendable).
- However, at a cabinet meeting on Sunday, May stated according to people attending that there was little prospect of cross-party meetings yielding an alternative to the plan rejected last week. Instead, she said she would seek changes to the Irish backstop session with the EU. Hence, uncertainty is very much alive given that the EU has ruled out a reopening of the deal. This will most likely be negative for GBP this morning.
Selected market news
The US equity rallied on Friday, while the US bond market continued the modest sell-off on Friday. The 10Y US Treasury bond yield has risen some 10bp since Monday last week, while the S&P 400 is up almost 7% since the start of the year. The gains on Friday in the US equity market were driven by expectations the US and China might reach a deal on trade.
On Saturday, US President Trump made some ‘tweaks’ to his proposal on the border wall.
However, the Democrats rejected the proposal and thus the government shutdown continues. Even though the new proposal does not offer an ending to the government shutdown, it may be a new start for negotiations between Democrats and Republicans.
Finally, US President Trump and North Korea’s President Kim are planning a second summit in February. The combination of a possible trade deal, an end to the government shutdown and de-escalation between Trump and Kim would be positive for the equity market and should lead to moderately higher yields.
This morning, China released GDP numbers for Q4, showing the weakest growth since 2009. The data was marginally better than expected even though growth in Q4 slipped to 6.4% down from 6.5%.
However, given the focus on a possible trade deal, this morning, Asian equity markets followed the positive sentiment from US equities.
Scandi markets
No Scandi market movers today. On Friday, we published an update on liquidity in the Danish money market and the effect on the EUR/DKK. We are in a period of excess liquidity in the Danish market, which keeps the T/N fixing low and makes it attractive for foreign investors buying short-dated Danish government bonds and T-bills. See FX Strategy - Update on DKK net position, 18 January 2019.
This week, the Danish Debt Management Office will launch a new 10Y benchmark bond.
It is expensive versus swaps and EU peers, but there are not that many non-callable alternatives in the Danish market. Thus, we expect solid demand at the auction on Wednesday. See New 10Y DGB – DGB 0.5% 11/2, 17 January 2019.
In Norway, the Norges Bank meeting on Thursday will set the agenda, as it is widely expected to confirm a March hike and signal one more hike in 2019. We see value in the SEP19 FRAs in Norway and hold the complete opposite view in Sweden.
Fixed income markets
Core- and semi-core government bond yields rose on Friday and the Bund spread tightened, while the periphery continued to perform. Here we could have seen support from the Japanese weekly flow data showed a significant pickup in Japanese overseas purchases in the week that ended January 11 as it might indicate that Japan was active buyers in the syndicated deals as well as in the secondary market.
However, we could see some profit taking this week given the significant performance we have seen in both Italy, Spain and Portugal. The 5Y spread between Spain and France, that we took on in December at 65bp is close to 50bp. The 5Y spread between Italy and Germany, which we took on 3 January, at 220bp is now close to 200bp. Finally, the new 10Y benchmark, which was introduced at ms-+112bp is trading at 90bp. An overview of the strong performance in the new syndicated deals in the European SSA market can be found in our Government Bonds Weekly, 18 January 2019.
One reason for the profit taking is due to the Bank of Italy making a downward revision to its growth forecast for the Italian economy. The Bank of Italy expects the economy at 0.6% in 2019, down from 1% in its previous forecast.
We expect more syndicated deals from the European Debt Offices this week. Austria is expected to launch a new 10Y. Germany is launching a new 5Y benchmark, while France is selling in the medium-term segment and linkers this week.
FX markets
Trade optimism has so far seemingly proved a USD positive; we see two possibly transitory reasons for this. First, recent signs that US activity has indeed been hit by the trade war suggest that a deal would be positive for US activity. Second, China could offer to buy more US goods over some period as part of a deal which is clearly also US(D) positive. However, we stress that over the medium term, a trade deal could become a net positive for EUR/USD as it would soothe the eurozone economy, partly via a recovering China, as well as putting pressure back on USD (rather than tariffs) to bear the burden of the current account adjustment.
Meanwhile, USD/JPY continues its return towards 110 as risk sentiment has improved and the commodity currencies cheer up. We continue to look for a trade deal on 3-6M, which should give rise to an appreciation in AUD, NZD, CAD and NOK vis-à-vis JPY, see FX Strategy - FX market blinked on trade headline, 18 January. Besides the next Brexit episodes, trade talks and the annual Davos gathering, focus for majors this week will be on what looks to be a rather busy Thursday, with both preliminary PMIs out of Europe and the US plus ECB and Norges Bank meetings. With no new policy signals likely from the ECB, we stick to our view that EUR/USD is in a range around 1.15 now and that we do not yet have lift-off in the cross as ECB remains hesitant.
For GBP focus today will be on the UK Prime Minister Theresa May’s presentation of her plan B for Brexit after the Brexit deal was rejected in parliament last week. Appetite for GBP has improved and EUR/GBP dipped below the lower bound of the 0.88-0.9060 on Friday. As such, we expect EUR/GBP to remain stuck in the current range until further Brexit clarification. Any indication that Article 50 will be extended or other measures that ensure that a ‘no deal’ Brexit can be ruled out would be positive for GBP and lead to a shift lower in the range for EUR/GBP.
After a turbulent end to 2018, the NOK FX market has once again normalised over the past weeks. Following an expected slowdown in NOK momentum, we still think there is a strategically solid case for a stronger NOK over the coming months, driven especially by (1) relative growth and relative rates, (2) tighter structural liquidity and (3) global risk appetite and higher oil. We remain short EUR/NOK via options and long NOK/SEK spot outright. For more information see Reading the Markets Norway published this morning.
