Market movers today
After the House of Commons once again rejected all Brexit versions on the table (see more below), PM Theresa May is meeting with her Cabinet today. Watch out for any statements on what's next during the day.
Danmarks Nationalbank (DN) is set to publish March's FX reserve numbers today. We expect no intervention as EUR/DKK did not trade as high as in December and January.
In the US, core capex numbers for February are released, which have showed some weakness in recent months. Overall, we expect investments to continue growing in 2019 but at a slower pace compared with 2017 and 2018.
Selected market news
Global growth optimism got a boost yesterday after the stronger-than-expected Chinese PMI data and a 55.3 reading for the ISM with a very strong new orders and employment index. The numbers kick-started a global risk rally that pushed global equity markets and yields higher. At the US close, 10Y US treasury yields were 10bp higher than the level at close on Friday night. PMI was also stronger in Asian countries and the UK.
However, the apparent global growth optimism is still not visible in the Euro zone. Euro area inflation figures for March disappointed yesterday by dropping to 0.8% y/y in March from 1.0% in February. Final PMI for the Euro zone also for March dropped another notch to 47.5 from 47.6 previously. In Germany, new orders dropped to 39.3. Hence, the Euro zone manufacturing sector remains in recession and the best we can say is that the PMI numbers are not getting significantly worse, but it cannot conceal that a Euro zone recovery is far away. The disappointing readings are bad news for the ECB and it underlines that ECB policy will likely be dovish for a very long time. Our expectations for next week's ECB meeting do not point to new policy measures; however, a continued cautious tone from Draghi should be expected given yesterday's news.
Yesterday's second round of indicative Brexit votes showed there is still no majority for anything in the House of Commons. That said, the three options (customs union, "Common Market 2.0" and a confirmatory public vote) were rejected by smaller margins than May's deal on Friday (but also got fewer ayes due to MPs abstaining). The Customs Union proposal was defeated by just three votes, while the confirmatory public vote got the most ayes (but still more noes). If some of the softer versions of Brexit (customs union or Common Market 2.0) make it at a later stage, PM Theresa May will find herself in a difficult position - party or country? - given the opposition to the customs union within her own party. We cannot rule out a general election if the Conservative Party implodes. With only 10 days left to Brexit, our base case remains a long extension but it may require EU leaders accepting there is no plan at the moment. The extraordinary EU summit takes place on 10 April. We think the probability of a no deal Brexit is low but not negligible.
Scandi markets
No important data today from Sweden and Norway.
Danmarks Nationalbank (DN) is set to publish March’s FX reserve numbers today. EUR/DKK rose during the second half of March. That probably owed to annual dividend payments from large Danish corporations. However, EUR/DKK did not reach the 7.4670- 80 highs seen in December and January, which triggered FX intervention. Hence, it probably stayed on the sidelines for the second month in a row.
Fixed income markets
The global fixed income market came under strong pressure yesterday as global growth optimism got a boost after the better-than-expected PMIs from China and the surprise jump to 55.3 in the ISM. At the US close, 10Y US treasury yields were some 10bp higher compared to the close on Friday night.
However, given that the Euro zone numbers remain weak, illustrated by the 0.8% y/y core inflation readings and the weak final PMI data, we strongly doubt we are in for a sustained Bund sell-off. Particularly as the ECB is likely to repeat the dovish rhetoric at its meeting next week.
Today, the market will focus on durable goods orders and Brexit.
We have published a DGB auction preview ahead of the 5y and 10y auctions tomorrow. Danish fixed income remains supported by the drop in duration in the callable mortgage market and an expected jump in excess liquidity in the coming two weeks. For more see FI Strategy Denmark, 1 April 2019.
FX markets
On a net-basis, the data releases yesterday were negative for EUR/USD. Regarding the USD-leg, the response in rates markets shows that the market is willing to price out Fed cuts again if data does not warrant it. This will be important to keep in mind when we get to Friday’s jobs report. It will likely reveal continued strength in the US labour market, which could underpin the USD further.
In the Scandies, the NOK rally from late last week has continued on strong Chinese data, risk-on, higher oil prices and better-than-expected Norwegian data raising the likelihood of a June rate hike. EUR/NOK and NOK/SEK have consequently broken through important technical levels and we think the NOK has room for a further move higher.
EUR/SEK broke through 10.40 on the back of the better-than-expected Swedish manufacturing PMI, but reverted towards 10.42 following the disappointing Euro zone CPI, thus closing the day pretty much unchanged. Macro data and global growth sentiment will likely remain key for the krona in the imminent future.
We believe EUR/GBP will stay in the 0.85-0.87 range until we get more clarification, which we should get soon given Brexit day is 12 April. If the UK leaves without a deal, we should see EUR/GBP move towards parity. If May’s deal is passed, we expect to see EUR/GBP move down to around 0.83. A long extension would be slightly GBP-positive and could cause EUR/GBP to finally break below the 0.85 mark and trade in the 0.84-0.86 range.
