Market movers today
Trade tensions between the US and China continue to be the key driver for markets (more in selected news).
On the data front, the main releases will be US retail sales for April and the US Empire business survey index for May. We expect retail sales to continue to show strength but would keep in mind the data is quite volatile on a monthly basis. Retail sales bounced back strongly in March after a weak start to the year. The Empire index will give us the first survey for May. We also get the first estimate of German GDP growth in Q1. We expect 0.4% q/q
In Scandi, we have Swedish inflation expectations from Prospera and Norwegian trade balance figures.
Selected market news
Things have calmed down a bit on the surface between the US and China on the trade war with no new issues to fuel the fire yesterday. Trump tweeted yesterday: "When the time is right we will make a deal with China". After adding that this must be a great deal for the US, he says: "It will happen, and much faster than people think!". It still seems every time stock markets are down, he starts tweeting about a deal coming. However, the nationalistic sentiment is growing on both sides and that could make it even harder to get a deal done. One of the key challenges regards China's willingness to change its laws, which is apparently a red line for China. But also one of the key requirements from the US. Will Trump be willing to sacrifice this demand? The next thing to look out for is whether a new round of talks is announced at some point or a potential phone call between Xi and Trump. Both might dampen the fears for a while. However, new talks are no guarantee of a deal and we see it as increasingly likely that it will take more financial stress for the two sides to feel enough pressure to find a compromise. This could easily drag into H2, see also US-China Trade: Back in the tit-for-tat spiral , 13 March 2019.
As a result, risk sentiment was holding up yesterday, sending equities higher by around 0.8% in the US and slightly more in Europe. This comes after the dreadful day on Monday with equities down markedly.
Adding to the risk factors, note also that by Saturday, 18 May, Trump has to decide on the potential of tariffs on European vehicles. While we do not expect Trump to go ahead with the tariffs, we should keep an eye on a potential new risk factors for the European/global economy. Should he go ahead, the tariffs must either be implemented within 15 days or he can delay implementation by 180 days if negotiations with the EU start (the latter may be more likely).
In our updated yield outlook published yesterday, we lowered our profile slightly, particularly due to our expectation of the ECB being on hold with rate changes past the end of 2021. We see 10Y bund yields at 0.15% on a 12M horizon, see more Yield Outlook - 10Y Bund yields set to remain close to zero far into 2020, 14 May 2019.
Overnight, Chinese industrial production was weaker than expected at 5.4% (6.5% consensus), pointing to Chinese growth not yet being out of the woods even before the USChina trade war escalation.
Fixed income markets
The market stabilised as President Trump is trying to ease fears of an outright trade war between China and US. Hence, US equities rose while US treasury yields rose very modestly. The 10Y spread between Italy and Germany remains under pressure and the comments from vice-PM Salvini that Italy ready to break the growth and stability pact is not supportive for Italian government bonds. The market is looking for structural reforms on the Italian economy rather than debt fuelled spending in Italy.
Today, we have preliminary GDP numbers from Germany and the Eurozone. Growth in Germany is expected to rise 0.7% y/y and we expect 1.2% for the Eurozone. The market will be looking for a continuation of the better than expected Q4 growth data. This would support the view that the Eurozone economy is slowly moving away from the risk of recession. However, the growth level is still very modest and thus the impact on rates should be limited.
We have Germany tapping EUR 1bn in the 30Y segment, while Norway will tap NOK 3bn in the 10Y benchmark.
FX markets
Global sentiment improved somewhat for the first time in little over a week as USD/JPY, EUR/NOK, EM currencies, semiconductors, commodity prices and cross-market volatility all showed some reversal. Mostly, this seem to be a consolidation on the back of little additional negative news and the strong repricing seen last week. Even if we see some nearterm stabilisation in market sentiment, NZD/USD and AUD/USD remain quite exposed to further pressure. These trade more closely to industrial commodities’ prices and the Chinese macro – which have yet to show convincing upward trends and are not focusing solely on creating a new manufacturing cycle. The NZD and AUD are likely to remain weak and follow potential CNY pressure in the coming month(s).
In the Scandies, the revised fiscal budget in Norway yesterday revealed a more expansionary budget than expected. Markets paradoxically rarely move on budget news but the release clearly supports the notion of both a June and a December rate hike from Norges Bank, as the central bank has underestimated fiscal spending.
EUR/DKK traded above 7.4690 yesterday; hence, above the level Danmarks Nationalbank (DN) sold EUR/DKK in FX intervention back in December and January. We are still some distance away from the historical peak in EUR/DKK. It is 7.4717 based on the daily central bank fixing and around 7.4740-50 based on intraday pricing. As we have emphasised before, DN is in a perfect position to be patient with ample FX reserves to draw on – in our view, it would be willing to draw down the FX reserve by around DKK40bn before it would consider a rate hike. Meanwhile, 3M (NYSE:MMM) EUR/DKK FX forward has moved to the right over the past couple of weeks. It may be due to foreign investors buying DKK assets again.
Nevertheless, DKK liquidity abundance should continue to exert a downward pressure on EUR/DKK FX forwards – see DKK Edge - FX forward discount has caught foreign investors’ eye, 14 May 2019.
Yesterday’s inflation print in Sweden was pretty much spot on the consensus (and the Riksbank’s) forecast. Still, seeing as EUR/SEK traded down some five figures (to 10.75), it seems that the market had at least some fears of yet another disappointing print, and that relief over this drove the cross down. Today’s release of inflation expectations (see Scandi section) should not have any major impact on the SEK, unless there is a big jump in either direction.
