- EU summit focused on growth and Greece. The leaders discussed Eurobonds as well as a common deposit insurance scheme.
- China’s HSBC manufacturing PMI declined to 48.7 in May from 49.3 in April.
- EUR/USD dropped to a two-year low on concerns of a Greek exit.
- Focus today will be on euro area PMIs, German IFO and the first release of US PMIs
Markets OvernightThe EU summit confirmed that growth initiatives will be presented in June but only a few new details were presented. The so-called project bonds appear to be one of the building blocks that will form the growth initiatives. The EU leaders confirmed their support for Greece remaining in the euro. Both Eurobonds and a common deposit insurance scheme were discussed but no consensus has been reached on these issues. France’s Hollande keeps pushing for Eurobonds, while Germany is opposing the proposal at this stage, see full statement from President Van Rompuy.
China’s HSBC manufacturing PMI in May declined to 48.7 from 49.3 in April. Current output improved from 49.3 to 50.5 (the highest level in seven months), while the forward-looking new order component was weak. The release suggests that GDP growth remained stuck below trend in Q1 in the 7%-8% range q/q AR but Chinese growth does not seem to be decelerating markedly. With growth stuck below trend and no signs of improvement, fiscal and monetary policy will be eased more aggressively in the coming months. In a statement overnight the Chinese State Council (government) said that China “must intensify precautionary adjustment and fine tuning of policies,” see Bloomberg. The statement said a series of new infrastructure projects will be started. We now expect another four 50bp cuts in the reserve requirement in the rest of the year but maintain our forecast that interest rate will be left unchanged, although the likelihood of a rate cut is increasing. We expect GDP growth to improve to above trend in H2 12 on the back of more aggressive
Risk appetite dropped yesterday on concerns about a Greek exit, after it was reported that eurozone finance ministry officials had held a conference call on Monday where each country was asked to detail their contingency planning, see FT. The negative sentiment from the European trade carried over to the US equities but the S&P500 ended the trade up 0.2% after a minor rally just before closing. The S&P future has decreased slightly in Asian trading. In Asia stock indices are trading in negative territory this morning. Nikkei is down by 0.5%, while Hang Seng is down by 0.6%.
In FX markets EUR/USD dropped to a two-year low and is this morning trading around 125.8. Also commodities sold off with Brent crude dropping to below USD106 - the lowest level this year.
Global DailyFocus today: Markets will digest the news from the informal EU dinner this evening. In addition, the data calendar is loaded with important releases: Flash PMIs for Euroland and US, German IFO, US durable goods orders and jobless claims data. Data on global growth have been mixed lately and today’s data should provide more clarity on the current strength of the recovery. In the euro area, we expect the manufacturing PMI to increase slightly from its depressed level and the German IFO to decline moderately, thereby narrowing the divergence between the two measures. In the US we will get the first ever release of the Markit flash PMI. The measure should be relatively close to the ISM, although Markit uses different weights on the sub indices to calculate the composite. The primary difference is more weight on new orders and production and less weight on supplier deliveries and inventories.
In addition, ECB President Draghi will speak in the afternoon and later on board member Asmussen, who – in unconfirmed media reports - has been pointed out to be heading an ECB working group on Greece, will give a speech about the ECB’s view on the crisis. This could prove interesting given the increased market speculation about further monetary policy easing from the ECB. In the US, New York Fed President Dudley will speak and any hints about possible QE3 triggers will be key.
Fixed income markets: No improvement of the sentiment after the EU summit and the Chinese data; hence we expect to see continued strong demand for safe-haven bonds, such as US Treasuries and German bonds, in the coming days. Today Denmark plans to issue up to DKK6bn. If the DMO sells the full amount with a bid-to-cover of around 2, the launch of the new 10Y linker will have been a big success. Demand is still expected to come from domestic investors but similar to increased foreign demand for Danish nominal government bonds, we expect foreign investors to gradually become buyers of the Danish index-linked bond, even though it is not yet part of the global inflation-lined bond indices.
FX markets: Risk sentiment seems to get worse and worse at the moment, as concerns about Greece leaving the euro are growing. The market direction is almost one-way traffic and last night the euro dropped to 1.2545 against the dollar, the lowest level in 22 months, before gaining a little. Today a lot of important macroeconomic releases will take centre stage. Unless data surprise significantly to the upside we will continue to see downside for EUR/USD and a test of our 1M forecast for EUR/USD at 1.25 seems imminent.
This morning’s bleak Chinese PMI number adds to the concerns about a hard landing in China and both AUD and NZD together with other commodity-sensitive currencies are likely to get even more headwind today. EUR/DKK has been trading below 7.4325 since Monday morning and the current level is at or close to levels that earlier have triggered intervention. A subsequent rate cut from the Danish central bank could come sooner rather than later if the downward pressure on EUR/DKK continues.
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