Key news
Global equity markets continue to rally on strong numbers, less eurozone debt fears and strong earnings
The rally in risky assets pushed up long-dated yields in the US and the US treasury curve steepened
Preliminary Chinese PMI stays below 50 in January
Markets Overnight
The strong sentiment in the European equity market yesterday was carried over to the US and all major US indices ended in green. The S&P500 is now at the highest level in five months. According to data compiled by Bloomberg, 22 of the 35 companies that have reported results since 9 January have beaten expectations. Yesterday both Morgan Stanley and Bank of America delivered better-than-expected results. Note that Google fell 10% in the aftermarket after reporting disappointing earnings, but this has not spoilt the party in Asia where Nikkei is up 1.4% this morning.
Overnight the preliminary China Markit PMI for January was released. It came out at 48.8 compared to 48.7 in December and was the third straight reading below 50. The indicator points to slower growth in China, but it should also boost the case for more Chinese monetary easing. In respect of the latter, note that IMF’s Lagarde overnight said that “the world faces significant and urgent challenges” and she warned about fiscal cuts that jeopardize growth. According to the Daily Telegraph IMF will cut its global growth forecast to 3.3% from earlier 4% when the World Economic Outlook is presented next week. That said, the US macroeconomic outlook continues to improve. Yesterday weekly claims fell by 50,000 to 352,000, which is the lowest level since 2008 and biggest weekly decline since 2005. Building permits also improved, even though housing starts
remained weak. Today the market will focus on existing home sales to see if the
improvement in the labour market has spread to the housing market.
So far this year US treasuries had been more or less immune for rallies in risky assets, but yesterday 10y yields were pushed up by close to 10bp and briefly traded above 2%. The 2y 10y curve steepened as short yields barely moved. Still, the US treasury was able to sell TIPS with a negative yield of 0.046% for the first time. Of course investors could still make money if inflation goes up in the future.
Yesterday Spain sold more longer-term debt than hoped and France issued bonds at a lower yield despite the stripping of its triple A rating last Friday by S&P. It also seems that the talks in Greece between Greek officials and private creditors are moving forward.
The parties will meet for a third day today after “long and substantial discussions” yesterday according to Finance Minster Venizelos. The improved sentiment in the European bond market has given support to the euro with EUR/USD continuing higher overnight. The cross is currently trading at 1.2966.
Global Daily
Focus today: A deal on Greek PSI could quite possibly be reached today or this weekend so that it can be presented to the Eurogroup in Brussels on Monday. It seems that Greece is pushing for 100% participation – probably to be achieved by introducing Collective Action Clauses in Greek law. Today is also the deadline for European banks to submit their detailed plans to EBA on how to raise capital to achieve the 9% core tier 1 capital ratio on 30 June 2012. The most interesting data release today is US existing home sales, which is expected to be fairly strong following upbeat pending home sales. Hungary’s
chief aid negotiator Fellegi will meet with EU Commissioner Olli Rehn to discuss
financial assistance, but we do not expect a breakthrough today.
Fixed income markets: The auctions in France and Spain yesterday went reasonably well and the markets now await a resolution on the Greek PSI – a deal with a large enough haircut to bring the Greek debt on a sustainable path would in our view be positive for the markets, as it would remove a great deal of uncertainty. German and US bond yields have shown some very tentative signs of increases over the past few days. Whether this is the first sign of a real turnaround is too early to tell. However, improving global risk appetite, strong US economic data and decent earnings reports continue to propel equity markets higher, which at some point should begin to take a toll on core bond markets. We believe that long bond yields are close to a trough in both the US and Germany.
FX markets: The euro continued to strengthen yesterday as Spain managed to raise more money than expected and as global equities continued to rise. Considering the stretched positioning in the market we continue to see upside for EUR/USD today. Next strong resistance is seen at 1.3077. We also continue to see more value in commodity and Scandi currencies. Yesterday we published a note discussing the outlook for GBP/NOK. In general we look for a divergent monetary policy between Norway and UK going forward,giving support to NOK.
Despite the support to the euro EUR/CHF continues to trade close to the lowest level since the 1.20 SNB minimum target was introduced in September. The market has lost its faith in a higher target being introduced at the March meeting after Hildebrand resigned as central bank governor last week. The SNB has pledged to keep the target, but Jordan -who is the favourite to take over after Hildebrand - is viewed as being less in favour of a
higher target.
Global equity markets continue to rally on strong numbers, less eurozone debt fears and strong earnings
The rally in risky assets pushed up long-dated yields in the US and the US treasury curve steepened
Preliminary Chinese PMI stays below 50 in January
Markets Overnight
The strong sentiment in the European equity market yesterday was carried over to the US and all major US indices ended in green. The S&P500 is now at the highest level in five months. According to data compiled by Bloomberg, 22 of the 35 companies that have reported results since 9 January have beaten expectations. Yesterday both Morgan Stanley and Bank of America delivered better-than-expected results. Note that Google fell 10% in the aftermarket after reporting disappointing earnings, but this has not spoilt the party in Asia where Nikkei is up 1.4% this morning.
Overnight the preliminary China Markit PMI for January was released. It came out at 48.8 compared to 48.7 in December and was the third straight reading below 50. The indicator points to slower growth in China, but it should also boost the case for more Chinese monetary easing. In respect of the latter, note that IMF’s Lagarde overnight said that “the world faces significant and urgent challenges” and she warned about fiscal cuts that jeopardize growth. According to the Daily Telegraph IMF will cut its global growth forecast to 3.3% from earlier 4% when the World Economic Outlook is presented next week. That said, the US macroeconomic outlook continues to improve. Yesterday weekly claims fell by 50,000 to 352,000, which is the lowest level since 2008 and biggest weekly decline since 2005. Building permits also improved, even though housing starts
remained weak. Today the market will focus on existing home sales to see if the
improvement in the labour market has spread to the housing market.
So far this year US treasuries had been more or less immune for rallies in risky assets, but yesterday 10y yields were pushed up by close to 10bp and briefly traded above 2%. The 2y 10y curve steepened as short yields barely moved. Still, the US treasury was able to sell TIPS with a negative yield of 0.046% for the first time. Of course investors could still make money if inflation goes up in the future.
Yesterday Spain sold more longer-term debt than hoped and France issued bonds at a lower yield despite the stripping of its triple A rating last Friday by S&P. It also seems that the talks in Greece between Greek officials and private creditors are moving forward.
The parties will meet for a third day today after “long and substantial discussions” yesterday according to Finance Minster Venizelos. The improved sentiment in the European bond market has given support to the euro with EUR/USD continuing higher overnight. The cross is currently trading at 1.2966.
Global Daily
Focus today: A deal on Greek PSI could quite possibly be reached today or this weekend so that it can be presented to the Eurogroup in Brussels on Monday. It seems that Greece is pushing for 100% participation – probably to be achieved by introducing Collective Action Clauses in Greek law. Today is also the deadline for European banks to submit their detailed plans to EBA on how to raise capital to achieve the 9% core tier 1 capital ratio on 30 June 2012. The most interesting data release today is US existing home sales, which is expected to be fairly strong following upbeat pending home sales. Hungary’s
chief aid negotiator Fellegi will meet with EU Commissioner Olli Rehn to discuss
financial assistance, but we do not expect a breakthrough today.
Fixed income markets: The auctions in France and Spain yesterday went reasonably well and the markets now await a resolution on the Greek PSI – a deal with a large enough haircut to bring the Greek debt on a sustainable path would in our view be positive for the markets, as it would remove a great deal of uncertainty. German and US bond yields have shown some very tentative signs of increases over the past few days. Whether this is the first sign of a real turnaround is too early to tell. However, improving global risk appetite, strong US economic data and decent earnings reports continue to propel equity markets higher, which at some point should begin to take a toll on core bond markets. We believe that long bond yields are close to a trough in both the US and Germany.
FX markets: The euro continued to strengthen yesterday as Spain managed to raise more money than expected and as global equities continued to rise. Considering the stretched positioning in the market we continue to see upside for EUR/USD today. Next strong resistance is seen at 1.3077. We also continue to see more value in commodity and Scandi currencies. Yesterday we published a note discussing the outlook for GBP/NOK. In general we look for a divergent monetary policy between Norway and UK going forward,giving support to NOK.
Despite the support to the euro EUR/CHF continues to trade close to the lowest level since the 1.20 SNB minimum target was introduced in September. The market has lost its faith in a higher target being introduced at the March meeting after Hildebrand resigned as central bank governor last week. The SNB has pledged to keep the target, but Jordan -who is the favourite to take over after Hildebrand - is viewed as being less in favour of a
higher target.