Danske Daily: February 16, 2012

Greek bailout decision has been delayed – the working deadline is now Monday

European sovereign spreads widened

Stocks closed lower in the US and risk sentiment remained weak in Asian trading

Focus today is on Scandinavia: The Riksbank is expected to cut by 25bp and Norges Bank governor Olsen will give his annual address

Moody’s places a large number of European banks under review for possible downgrade

Markets Overnight

The Greek bailout negotiations once again added to market volatility yesterday, as Wednesday’s Eurogroup meeting was cancelled. A teleconference was held instead and Jean-Claude Juncker (who heads the eurozone minister meetings) said there had been “substantial further progress”. The EU leaders have demanded assurances from Greek party leaders that the promised austerity measures will indeed be implemented on the other side of the Greek elections and that EUR325m of additional budget cuts should be identified.

According to Juncker, the two party leaders in Greece’s ruling coalition have now delivered on this, but Juncker noted that further moves were necessary before Greece’s second bailout could be sealed.  Basically, the Troika needs to implement measures to make sure that Greece does not continue to outperform on reform promises, but underperform on reform implantation. The working deadline to close the negotiations is now Monday – when finance ministers are scheduled to meet in Brussels.

Until the bailout and PSI negotiations are closed these are likely to remain a source of market volatility. Not least since a Greek default or even EMU exit is no longer taboo, but is rather being discussed more or less openly. European sovereign spreads widened across the board and the euro weakened – with EUR/USD retracing to near 1.30.

US stocks closed lower - with the S&P500 index down 0.5% - following mixed US data showing a stronger-than-expected Empire Manufacturing survey, but disappointing January industrial production numbers. Stocks are lower across the board in Asia.

Brent oil temporarily traded as high as USD120 per barrel yesterday after reports from Iran that the country may pre-empt an EU oil embargo by cutting its own exports. The report was later denied (or at least not confirmed) and oil traded back below USD119 –also under pressure from weaker risk sentiment.

FOMC minutes published yesterday did not bring any major surprises, but rather confirmed the consensus view in the market that it will take disappointing economic data for the Fed to initiate further easing (i.e. QE3). Treasuries ended mixed, but yields have moved lower overnight.

Global Daily

Focus today: The Philadelphia Fed business survey is probably the main market mover today. We expect an improvement to 8.5 (consensus 9.0) from 7.3 as the manufacturing sector has shown strong momentum. We will also get a basket of housing market related data out of the US, which may provide further evidence that the US housing market is beginning to recover. We expect an above-consensus increase in housing starts, while our expectations for a moderate increase in building permits  are more  in line with the consensus view. The US Producer Price Index is expected to come down but we expect PPI core inflation to remain at 3.0%. Earnings from among others Societé General and General Motors may also attract some attention today. Finally the ECB  will publish its monthly report.

Fixed income markets: It was another volatile session yesterday for European markets with the Greek news flow continuing to dominate. The 10yr EUR swap rates have continued lower to around 2.25%, which is very close to the lows of 2012 and not far from the historical low of 2.20%. We might have to test these lows again in the coming days, but we think that long-term EUR swap rates are close to bottoming out. France and Spain are going to the market today. France plans to sell as much as EUR8.5bn in twothree- and five-year bonds, while Spain aims to sell up to EUR4bn in bonds maturing 2015 and 2019. In addition, France is auctioning as much as EUR1.8bn of index-linked bonds.

FX markets: EUR/USD is testing support levels around 1.30 and if these are breached we could see another undershoot to the high 1.20s. We do see underlying pressure on the dollar though, and doubt that EUR/USD will return to a downward trend unless a deal is not reached in Greece. AUD/USD has dipped below 1.07 despite a strong employment report and in general the commodity currencies are vulnerable as long positions have been rebuilt to stretched levels.

Moody’s places a large number of European banks under review for possible downgrade: The actions reflect, to differing degrees, the combined pressures from (i) the adverse and prolonged impact of the euro area crisis, which makes the  operating environment very difficult for European banks; (ii) the deteriorating creditworthiness of euro area sovereigns, which led to the adjustment of the ratings for nine European sovereigns on 13 February 2012; and (iii) longer-term, the substantial challenges faced by banks and securities firms with significant capital market activities.

Scandi Daily

Sweden: Today is a big day in Sweden. The Riksbank will deliver its verdict on rates and January inflation will be released - both at 09:30 CET. We expect the Riksbank to cut by 25bp and to be forced to lower its view on economic growth prospects by an apparently weak Q4 GDP and in turn, a lower inflation forecast. SEK is about 3% stronger than what the Riksbank has assumed and the fact that the outlook for policy rates has been cut in Europe and the US should make the Riksbank's models indicate additional appreciation pressure on the  krona. Needless to say, this puts downward pressure on inflation.

Moreover, there is no longer any risk of excessive credit growth and Swedish house prices now show modest declines. One reason for this is tighter lending standards for house buyers and a widening of mortgage lending rate spreads. We also believe that the Riksbank may be about to embrace the reduced economic forecasts coming from the Fed, the World Bank and the IMF.

We are on the low side of expectations when it comes to January inflation, being about 0.2 percentage points lower than the market for both CPI and core inflation. We do not expect any significant "re-weighting" impact from mortgages, but other components may very well comprise a downside risk to our forecast. Note also that restaurant VAT was cut from 25% to 12% in January implying a potential 10% cut in prices. We have only assumed that 1/5 of this will feed into lower prices. And, in addition, we have assumed quite ordinary January clothing sales. But as these have dragged on well into February, this may signal that sales have been more pervasive than what we have assumed.

If we are correct, short rates are set to rally this morning and EUR/SEK will  correct  higher. However, while EUR/SEK may look somewhat oversold from a short-term perspective we still expect the underlying SEK appreciation trend to remain in place  – as reflected in our 8.50 12M forecast. 

Denmark: The krone is trading stronger and EUR/DKK is below levels where the central bank has previously intervened. As on any other Thursday there is a probability of an independent rate cut, but we do not see it as very high today. The inflow into Danish bonds appear less strong than in Q4 and with policy rates already at very low levels it may take a larger build-up in the currency reserve for the central bank to cut rates. In other words, we do not expect an independent rate cut today.

Norway: Q4 GDP figures will probably show growth in the mainland economy of 0.5% q/q, which is slightly below trend, but far from disastrous with Europe in recession. Although this is also somewhat lower than Norges Bank predicted in October, we think it will be enough to stave off further rate cuts not least considering that the labour market has continued to tighten and house prices have risen in January.

But today’s main event is the annual address tonight at 18:00 CET by central bank governor Olsen. From time to time, this speech has had a significant market impact. Hence, the market will scrutinize it for comments on whether rates have bottomed out or not. Considering the latest NOK appreciation we think he might sound “dovish” to avoid further currency appreciation. However, his job is not that easy at the moment considering that the Norwegian economy overall is performing very well. Especially, we would look for comments on the currency. We would not be  surprised if some of the comments that were made in September last year when NOK appreciated strongly in the aftermath of the SNB minimum target announcement will be repeated.

In September Olsen said, “A krone that is too strong can over time result in inflation that is too low and growth that is too weak. In that case, monetary policy measures will be taken. In Norway, the key policy rate is the relevant instrument”. He further added, “The exit [from the NOK] may prove narrow if too many investors decide to withdraw at the same time.”

If he does, it is expected to weaken NOK, though we doubt the reaction will be nearly as strong as in September. Still, we decided yesterday to close our short EUR/NOK recommendation from FX 2012 Top Trades.  From a rates perspective we see the risk clearly on the downside for Norwegian rates today ahead of the annual address.