Market movers today
- Focus this morning will be on the effects in the oil market from the attack on Saudi production facilities and the repercussions for financial markets, see Flash Comment International: Saudi oil production under attack , 15 September 2019. The oil price jumped 10% to USD66 per barrel overnight following a drone attack on Saudi production facilities. The attack is set to lead to a temporary loss of 5.7 million barrels per day corresponding to 5% of the world's oil output. US President Donald Trump tweeted overnight that the US is 'locked and loaded depending on verification, but we are waiting to hear from the Kingdom...'. The new uncertainty in the oil market adds to an already long list of uncertainties facing the global economy and is set to increase the downward pressure we are currently witnessing.
- On the data front today we get the US Empire index for September. The index recovered a bit in the past two months following a big drop in late spring. UK's Prime Minister Boris Johnson meets with EU Commission President Jean-Clause Juncker on Monday in his first negotiations, see Bloomberg .
- Otherwise global markets will focus on the Fed meeting on Wednesday , where we look for another rate cut but not a pre-commitment to further easing, see FOMC preview . This could be a disappointment for markets. Any comments from low-level trade talks between US and China will also be on the radar following more positive developments on both sides lately, see China Weekly Letter: Signs of goodwill and interim deal now in play , 13 September 2019. Finally, SNB and Bank of England meet on Thursday.
- In Scandi attention will turn to Norges Bank on Thursday where we look for a rate hike. In Sweden Riksbank minutes released tomorrow are expected to show a big disagreement within the Executive Board, see Reading the Markets Sweden , 13 September 2019.
Selected market news
Stock markets are lower in Asia following the jump in the oil price but declines in the different markets are less than 1%. It suggests markets believe this will only be a temporary headwind. US bond markets have not traded as Japan is closed. EUR/USD has been broadly unaffected.
Chinese data disappointed overnight as industrial production growth dropped to a new low at 4.4% y/y (consensus 5.2% y/y, previous 4.8% y/y). Retail sales were also lower than expected at 7.5% y/y (consensus 7.9% y/y, previous 7.6% y/y). It underlines that the world's biggest growth engine continues to see downward pressure on growth. China's premier Li Keqiang said in an interview that it is 'very difficult' for China's economy to grow at 6% or more. We expect more stimulus to be announced from China in coming months.
Scandi markets
There are no Scandi market movers today. Markets await the Norges Bank meeting and Riksbank minutes later this week.
Fixed income markets
The sell-off in European fixed income and curve steepening accelerated on Friday as the hawks continue to speak out against the ECB package. Weidmann topped the critique saying in Bild that he will make sure that interest rate increases will not be delayed unnecessary. Even though Draghi underlined that there was no vote on the package, it is obvious that the governing council is heavily divided six weeks before Lagarde takes over.
The Italian curve behaved very differently as the short end remained under pressure from the new tiering system that could push Italian repo rates higher. The long-end (10-30Y), on the other hand, remains supported from the open-ended QE and positive political news from the new government. That said, Finance Minister Gualtieri over the weekend dismissed reports that the new government would raise money from asset sales. We stick to our recommendation to buy 10Y BTP versus 10Y Bunds and lowered our target to 120bp as our previous 140bp target was hit last week. See more in Government Bonds Weekly. We also argue that the market should not underestimate the power of open-ended QE on top of sizeable reinvestment flows and we stay long Italy and Spain in periphery, Finland and Ireland in semi-core and stay positioned for wider asw-spreads in the 10-30 segment in core markets (Germany/Netherlands). In respect of periphery we note that the outlook was changed to positive for Portugal on Friday by S&P.
This week central banks continue to set the agenda and focus will be on FOMC, BoJ and Norges Bank. In respect of the latter, we expect a rate hike and we doubt that the rate path will signal that the next move will be a cut as the NOK money market is pricing in.
FX markets
Oil exporting currencies NOK and CAD opened sharply higher on Sunday following news over the weekend that Saudi Arabia temporarily has lost 5.7mb/d of oil output following a drone attack. USD/JPY initially also opened lower by 0.5%, moving to almost 107.5.
Looking ahead, USD/JPY will often move higher on a rising oil price but if markets price this as rising geopolitical risk, USD/JPY will likely face downward pressure.
In the aftermath of ECB’s policy shift last week, the Swiss National Bank (SNB) will hold its quarterly policy meeting this Thursday. In light of SNB’s apparent CHF selling since its last meeting and Thursday’s ECB rate cut it may seem natural to expect a Swiss rate cut.
However, in light of the significant repricing of Swiss money-market rates following the rise in short-end euro-zone rates on the back of ECB tiering details and a EUR/CHF that is largely back at pre-ECB levels, we think the SNB will try to ‘get away’ with keeping policy rates unchanged at the current -0.75%. This could weigh temporarily on EUR/CHF.
EUR/DKK bounced sharply higher on Friday to around 7.4680 and thus towards the highs from earlier this year. By lowering its key policy rate 10bp on Thursday, Danmarks Nationalbank (DN) has effectively increased the spread between short-term DKK and EUR rates; hence, increased the negative carry on short EUR/DKK positions. While the rate cut was in response to a 10bp rate cut from the ECB on Thursday, the ECB rate cut was not fully passed through to market rates due to the introduction of a tiered deposit system in the euro area. EUR/DKK is now trading close to FX intervention levels from last December and January. DN may be forced eventually to halt DKK depreciation pressure through FX intervention. While this may trigger some anxiety in the market about whether DN would undo last week’s rate cut, we stress that DN has ample FX reserves to draw on before considering this option.
Key figures and events
