- In a key speech, the French president stated that Germany and France must converge to ensure European stability. ECB President Draghi, in his first testimony to the European Parliament, hints at more active.
- ECB involvement on the condition of bolder fiscal rules in Europe.
- Europe moves towards imposing larger sanctions on Iran, including a potential oil imports embargo.
In US equity markets, the main stock indices ended the day near-flat despite stronger-than-expected ISM manufacturing numbers, as gains in technology, health care and retail companies fell slightly short of losses in financial firms, with the S&P 500 index closing the day down 0.2%. In overnight trading, Asian stocks consolidated following the largest weekly gain in a month, with all indices outside of Japan and Australia falling modestly.
In a key speech yesterday in Toulon, French President Sarkozy announced further talks with German Chancellor Merkel on Monday and stated that Germany and France need to converge to ensure European stability. He also stressed the need for a new EU treaty to impose greater fiscal integration.
ECB President Mario Draghi, in his first appearance before the European Parliament on Thursday, gave indications that the ECB could scale up its bond buying programme after the European summit on 9 December on condition of greater fiscal rules in Europe. He further signalled additional steps were likely ahead of next week’s rate announcement. For more on this story, please see Financial Times.
While the short end of the US bond yield curve was little changed, 30-year bonds were up by about 4bp during the American trading session, thus giving rise a slight steepening of the yield curve. While US yields continued to trade in narrow ranges, Treasuries were down for the fifth consecutive trading day, as US data has continued to beat expectations.
In FX markets, G10 currencies traded in fairly tight ranges with the Canadian dollar standing out as the peer group outperformer ahead of Canadian employment data, set for release later today. EUR/USD overnight was contained the 1.34-35 range, drifting slightly lower from yesterday, ahead of today’s key US payroll release at 14:30 CET.
Global daily:
Focus today: The main release today will be US non-farm payrolls for which we have revised up our estimate to 150k following strong labour market indicators recently. Consensus is 125k but expectations in the market are probably higher following strong labour market data this week. ADP employment, which covers the private sector, rose to 206k in November, signalling a renewed pick-up in hiring. The labour component in consumer confidence also improved markedly in November. In addition, ISM indices for employment are generally strong. Also continue to keep an eye on comments from EU politicians as they will probably want to guide expectations up ahead of the EU Summit next week.
Fixed income markets: A stronger-than-expected non-farm report should underpin the relative strength of US data to European data. This should lead to underperformance of US bonds relative to German bonds if there is a positive risk reaction in the markets. At least this has been pattern over the past few days. Otherwise the markets will continue to position for aggressive ECB easing ahead of the rate setting meeting on Thursday.
FX markets: A plan to tackle the raging debt crisis appears to be taking shape, as leading players in the negotiations seem to be moving closer to a deal. The market remains short the EUR and positive news could lift the single currency considerably. Meanwhile, an upside surprise in yesterday’s US ISM manufacturing release has bolstered hopes that the global recovery remains intact. Even though the reaction in EUR/USD was muted, if the trend for improving US economic data continues, it could provide crucial support to risky assets. Hence, the risks in EUR/USD are becoming increasingly two-sided. Today, market focus will centre in on the US employment report at 14:30 – the reaction in EUR/USD is likely to be positively correlated with the sign of a surprise relative to market expectations.
Scandi daily:
Denmark: Despite the significant move lower in EUR/DKK yesterday morning, the Danish central bank, Nationalbanken, did not opt for an independent rate cut yesterday afternoon. However, we still believe it is just a matter of time before Nationalbanken will act. We still expect strong inflow into Danish bonds from both foreign and domestic accounts, as the krone is seen as a hedge against the current debt crisis by many investors. Hence, we continue to forecast that Nationalbanken will lower Danish policy rates by an additional 10bp, when the ECB is anyway expected to lower rates by 25bp or 50bp on 8 December 8. If the downward pressure on EUR/DKK intensifies, a surprise cut before that date cannot be ruled out.
Monthly currency reserve numbers are due to be released today. It will be interesting to see the amount of intervention that took place ahead of the 3 November rate cut and over the past two weeks, when the inflow into DKK has once again intensified. Note that the net contribution from central government borrowing in foreign currency is expected to shrink the currency reserve by DKK32.1bn in November. However, the currency reserve is still expected to be an approximately DKK460bn after this.
Norway: Norwegian unemployment numbers for November are not expected to attract much attention. But at an expected 2.4%, they underline the tightness of the Norwegian labour market despite the current debt crisis. That said, Norway is not an island, which the drop below 50 in the PMI yesterday underlined.