Key news
Equity markets rallied strongly yesterday on the back of global central easing and strong US data. In cooperation with European central banks and the Japanese central bank Fed lowered the rate on dollar liquidity swaps by 50bp. Shortly before China had reduced the reserve requirement ratio by 50bp in a surprisingly early move to stimulate the economy . In addition the central bank in Brazil has reduced the leading rate by 50bp for the third time since August. In the US ADP payrolls report was very strong rising 206k and Chicago PMI increased to 62.6 from 58.4 in another sign that the US industry is picking up speed.
S&P500 finished up more than 4% and the S&P future has held on to all gains in Asian time. Hang Seng is outperforming in Asia, up almost 6%, while most other Asian markets rally 3-4%.
A decline in Chinese PMI overnight has not had any negative impact. PMI measured by NBS fell to 49.0 (consensus 49.8) from 50.4, while HSBC PMI was revised down to 47.7 from the flash estimate of 48.0.
US 10-year bond yields are broadly unchanged overnight after rising 10bp on the boost to risk appetite. Bond yields in Italy fell steeply with the 10-year yield coming back down to 7.0% - a decline of 30bp. Similar moves were seen in other euro markets. The 10-year yield in Spain fell to 6.20% and the French 10-year yield traded down to 3.38%.
In FX markets EUR/USD has settled down a bit, declining back towards 1.345 after spiking above 1.35 briefly yesterday following the announcement about the cut in the dollar swap rate. Both EUR/NOK and EUR/SEK have recovered slightly after a strong decline yesterday on the rise in risk sentiment. USD/JPY is also slightly higher.
Fed’s Beige Book points to slow to moderate gains in economic activity – much in line with the current 2-3% GDP growth pace. Although employment gains are viewed as subdued, companies in half of the districts pointed to scarcity of highly skilled workers. This points to a rise in the structural unemployment rate.
In FT today former ECB chief economist Otmar Issing argues against ECB bond buying saying that it would result in moral hazard, that it would break the law and that ECB credibility would be at risk and hard to restore.
Global Daily
Focus today: Main mover today will be the US ISM manufacturing index. We expect to see a rise to 52.0 in November from 50.8 in October (see ISM Monitor). GDP and industrial production have already recovered, but ISM has been lagging. In fact, ISM has lagged the hard data throughout 2011 and has been a poor indicator for growth. Nevertheless, it is still important for market sentiment and a rise today should underpin risk appetite. Final PMI for the euro area and UK PMI will also be released today. Of interest will be ECB president Mario Draghi’s speech at the European Parliament this morning in which ECB’s role in fighting the euro crisis is likely to be a key theme.
Fixed income markets:
The coordinated action by the Federal Reserve and a number of global central banks to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50bp brought much needed relief for the markets. This is especially bringing relief to the European banking system, as the maximum price for dollar funding has now been lowered, which should ease the market price of USD funding too. Overall it appears that the ECB rhetoric is softening now and it is not a question whether it will cut its key rates next week, but by how much they will be cut and whether 24M/36M liquidity tenders will be introduced too. Overall we feel that the positive market dynamics could have further to go ahead of the important events next week (ECB meeting and EU summit) as market expectation will build that the ECB will scale up bond purchases and the EU politicians will move further on fiscal integration. Look out for government bond auction in Spain (SPGB - EUR3bn) and France (OAT - EUR7bn) today.
FX markets: Yesterday’s coordinated action by global central banks to ease funding conditions clearly caught the market on the wrong foot, with the market massively short EUR and risky assets in general. Hence, the upward reaction in EUR/USD was fierce, rising to levels close to 1.35.However, since solvency issues remain at the core of the debt crisis, yesterday ’s coordinated action is not a solution, but it is likely to have raised hopes of a firmer policy response. Hence, volatility is likely to stay high as the tug of war between stretched positioning and downside risks stemming from the debt crisis continues. Market focus is now zooming in on the 8 December ECB meeting and the EU summit the day after.
Scandi Daily
Norway: Having held up well earlier in the autumn, Norwegian PMI dropped to 50.8 in October, and we expect it to fall further to 50.3 in November given the continued slide in European PMIs and the dip in the orders sub-index in October. It does, however, appear that there was a strong downward stock correction in September and October, and if this correction is now largely over, this brings a degree of upside risk to our forecast. Norwegian manufacturing is currently being pulled one way by very weak growth in European markets and the other way by further high levels of activity in oil-related industries. We will also keep an eye on the house price data that will be released at 11.00 CET. Norwegian house prices are up close to 10% this year and further price increases are expected in November. The strong housing market and strong activity in oil-related businesses are some of the reasons why a rate cut by Norges Bank this year is not a done deal, and why we see further downside for EUR/NOK, see FX Crossroads.
Denmark: Despite the significant move lower in EUR/DKK early last week the Danish central bank, Nationalbanken, did not lower interest rates last Thursday. Given that EUR/DKK has been more or less stable over the last week we forecast unchanged rates also today. However, as we expect continuous strong inflow into Danish bonds we continue to see downward pressure on EUR/DKK and project it is just a matter of time before Nationalbanken will deliver an independent rate cut. Most likely next Thursday when the ECB is widely expected to lower rates anyway.
Sweden: We look for another decline in Swedish PMI in December in line with what we have observed in peer economies like Germany and France. NIER business confidence edged lower too. A counterargument would be the improvement seen in the order-inventory spread, which often has been a good leading indicator. PMI sub-50 would be consistent with our GDP forecast for the coming quarters.
- Stocks shoot higher on global central bank easing and strong US data.
- Bond yields in Italy, Spain and France decline strongly.
- Chinese PMI declines more than expected in November.
- Fed’s Beige Book points to slow to moderate gains in activity
- Focus today is on bond auctions in Spain and France and US ISM.
Equity markets rallied strongly yesterday on the back of global central easing and strong US data. In cooperation with European central banks and the Japanese central bank Fed lowered the rate on dollar liquidity swaps by 50bp. Shortly before China had reduced the reserve requirement ratio by 50bp in a surprisingly early move to stimulate the economy . In addition the central bank in Brazil has reduced the leading rate by 50bp for the third time since August. In the US ADP payrolls report was very strong rising 206k and Chicago PMI increased to 62.6 from 58.4 in another sign that the US industry is picking up speed.
S&P500 finished up more than 4% and the S&P future has held on to all gains in Asian time. Hang Seng is outperforming in Asia, up almost 6%, while most other Asian markets rally 3-4%.
A decline in Chinese PMI overnight has not had any negative impact. PMI measured by NBS fell to 49.0 (consensus 49.8) from 50.4, while HSBC PMI was revised down to 47.7 from the flash estimate of 48.0.
US 10-year bond yields are broadly unchanged overnight after rising 10bp on the boost to risk appetite. Bond yields in Italy fell steeply with the 10-year yield coming back down to 7.0% - a decline of 30bp. Similar moves were seen in other euro markets. The 10-year yield in Spain fell to 6.20% and the French 10-year yield traded down to 3.38%.
In FX markets EUR/USD has settled down a bit, declining back towards 1.345 after spiking above 1.35 briefly yesterday following the announcement about the cut in the dollar swap rate. Both EUR/NOK and EUR/SEK have recovered slightly after a strong decline yesterday on the rise in risk sentiment. USD/JPY is also slightly higher.
Fed’s Beige Book points to slow to moderate gains in economic activity – much in line with the current 2-3% GDP growth pace. Although employment gains are viewed as subdued, companies in half of the districts pointed to scarcity of highly skilled workers. This points to a rise in the structural unemployment rate.
In FT today former ECB chief economist Otmar Issing argues against ECB bond buying saying that it would result in moral hazard, that it would break the law and that ECB credibility would be at risk and hard to restore.
Global Daily
Focus today: Main mover today will be the US ISM manufacturing index. We expect to see a rise to 52.0 in November from 50.8 in October (see ISM Monitor). GDP and industrial production have already recovered, but ISM has been lagging. In fact, ISM has lagged the hard data throughout 2011 and has been a poor indicator for growth. Nevertheless, it is still important for market sentiment and a rise today should underpin risk appetite. Final PMI for the euro area and UK PMI will also be released today. Of interest will be ECB president Mario Draghi’s speech at the European Parliament this morning in which ECB’s role in fighting the euro crisis is likely to be a key theme.
Fixed income markets:
The coordinated action by the Federal Reserve and a number of global central banks to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50bp brought much needed relief for the markets. This is especially bringing relief to the European banking system, as the maximum price for dollar funding has now been lowered, which should ease the market price of USD funding too. Overall it appears that the ECB rhetoric is softening now and it is not a question whether it will cut its key rates next week, but by how much they will be cut and whether 24M/36M liquidity tenders will be introduced too. Overall we feel that the positive market dynamics could have further to go ahead of the important events next week (ECB meeting and EU summit) as market expectation will build that the ECB will scale up bond purchases and the EU politicians will move further on fiscal integration. Look out for government bond auction in Spain (SPGB - EUR3bn) and France (OAT - EUR7bn) today.
FX markets: Yesterday’s coordinated action by global central banks to ease funding conditions clearly caught the market on the wrong foot, with the market massively short EUR and risky assets in general. Hence, the upward reaction in EUR/USD was fierce, rising to levels close to 1.35.However, since solvency issues remain at the core of the debt crisis, yesterday ’s coordinated action is not a solution, but it is likely to have raised hopes of a firmer policy response. Hence, volatility is likely to stay high as the tug of war between stretched positioning and downside risks stemming from the debt crisis continues. Market focus is now zooming in on the 8 December ECB meeting and the EU summit the day after.
Scandi Daily
Norway: Having held up well earlier in the autumn, Norwegian PMI dropped to 50.8 in October, and we expect it to fall further to 50.3 in November given the continued slide in European PMIs and the dip in the orders sub-index in October. It does, however, appear that there was a strong downward stock correction in September and October, and if this correction is now largely over, this brings a degree of upside risk to our forecast. Norwegian manufacturing is currently being pulled one way by very weak growth in European markets and the other way by further high levels of activity in oil-related industries. We will also keep an eye on the house price data that will be released at 11.00 CET. Norwegian house prices are up close to 10% this year and further price increases are expected in November. The strong housing market and strong activity in oil-related businesses are some of the reasons why a rate cut by Norges Bank this year is not a done deal, and why we see further downside for EUR/NOK, see FX Crossroads.
Denmark: Despite the significant move lower in EUR/DKK early last week the Danish central bank, Nationalbanken, did not lower interest rates last Thursday. Given that EUR/DKK has been more or less stable over the last week we forecast unchanged rates also today. However, as we expect continuous strong inflow into Danish bonds we continue to see downward pressure on EUR/DKK and project it is just a matter of time before Nationalbanken will deliver an independent rate cut. Most likely next Thursday when the ECB is widely expected to lower rates anyway.
Sweden: We look for another decline in Swedish PMI in December in line with what we have observed in peer economies like Germany and France. NIER business confidence edged lower too. A counterargument would be the improvement seen in the order-inventory spread, which often has been a good leading indicator. PMI sub-50 would be consistent with our GDP forecast for the coming quarters.
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