Market movers today
We start off a relatively quiet week with euro area Sentix investor confidence. The index has been on a steady downward trend since August and at -1.5% remains at its lowest level since 2015. But in light of more dovish central bank signals recently and clouds clearing over the US-China trade negotiations, we could see a small rebound in sentiment in February (for more information, see our new Euro Area Macro Monitor - Recession angst is building , 4 February).
In Denmark, currency reserve data for January will be scrutinized by markets for further FX interventions by Danmarks Nationalbank..
Selected market news
Asian stocks started the week with modest gains following strong U.S. economic data and positive comments out of Washington on the trade talks . Trading in Asia is more subdued as much of the region heads into Lunar New Year holidays. The general positive risk sentiment buoyed Japanese stocks, as the less need for safe-haven flows weakened the weaker. Australian stocks also advanced, while Hong Kong shares were little changed.
On Friday, the US economy showed its resilience despite recent concerns about the economy slipping towards a recession : the non-farm payrolls (NFP) release showed more than 300,000 jobs were added in January (although part of the increase was tempered by a downward revision of the strong December number)the report marks the hundredth month of positive employment growth. However, wage growth was more muted. Furthermore, the manufacturing survey ISM was also strong, rising to 56.6 from 54.3 in December, particularly driven by big jump up in new orders to 58.2 from 51.3. Construction spending was strong as well, growing +0.8% m/m in Nov after -0.1% m/m in October. We generally believe the US economy will do well this year, expecting it to grow 2.7% this year (for more details see here ). However, in terms of the Federal Reserve, the central bank has clearly hinted that inflation developments will be important in driving further rate hikes and as wage growth was the only soft spot in the NFP release on Friday, the market pricing of the next Fed hikes will probably not change much, indicating the Fed is on hold for now.
Risk sentiment was on positive news on the trade talks between China and the US as U.S. President Donald Trump over the weekend told CBS that trade talks with Beijing are "doing very well". He also sounded confident an agreement with North Korea was on the horizon. On the trade discussions with China, Xi Jinping and Donald Trump 'may meet in Da Nang, Vietnam' on February 27 and 28 just shy of the end-February deadline according to sources familiar with discussions ( see here ). In our view, we are getting more confident that we are closer to a deal and that the probability of a deal in March has increased. The intense efforts put into the talks at the highest level - including from Trump and Xi - suggest that both sides are very keen to get the work done ( for more details, see our China Weekly Letter--On track for a trade deal, first signs of a bottom in growth , 1 February).
Scandi markets
Today, Realkredit Danmark (RD) and Nykredit will kick off the February 2019 refinancing auctions. During the refinancing auction period, the mortgage banks plan to sell DKK 97bn in non-callable non-government guaranteed bullets (ARM loans). Of the total auction amount of DKK97bn, supply in 1Y, 3Y and 5Y DKK bonds is set at DKK50.9bn, 25.1bn and 16.1bn, respectively. For more details on the February 2019 refinancing auctions, see February Auctions – Last big offering of cheap noncallable bullets in 2019, 30 January.
This will be the last big auction in 2019, as the supply at the non-callable mortgage auctions in June, August and November will be relatively small. Hence, this auction will be an opportunity of picking up some cheap non-callables, as the limited supply and excess liquidity in the Danish market will lead to tighter spreads going forward. From a carry and risk perspective, 3Y non-callables look more attractive versus DGBs than 4Y and 5Y noncallables versus governments. For outright investors, the sweet spot on the non-callable curve remains the 5Y point. At the auctions today, RD and Nykredit will sell DKK 5.05bn and 2.9bn, respectively, in Apr-20 (Level 1B) covered bonds. RD will also sell DKK 2.1bn and 1.9bn, respectively, in 3Y and 5Y (Level 1B) covered bonds. In addition, Nykredit will sell DKK 4.3bn in 1Y-10Y government guaranteed covered bonds issued out of capital centre J.
Fixed income markets
There was a decent rebound in US bond yields on Friday on the back of the stronger than expected US Labour market report. In Euroland, the gains we had seen in Italian bond yields for the past few weeks was almost erased on Friday given the weak Italian GDPdata.
The weak GDP -data showed that Italy was in recession. We expect the Italian bond market to stabilise on the back of signals from the Italian finance minister saying they would block Bundesbank president Weidman to become the next head of ECB.
The main event today is coming from Denmark where we have the release of the currency reserve as well as the start of the noncallable auctions for the April term. The auctions are an opportunity to snap up some cheap noncallable mortgage bonds. See more here on the auction schedule for the non-callables.
FX markets
In majors, despite strong US jobs and manufacturing PMIs, USD was remarkably stable towards the end of last week which also saw the US and China getting one step closer to a trade deal. A possible bottom in the US cycle does not change our view that the Fed has gone on hold for now and much faded the carry momentum support for USD. As we are at the same increasingly confident that a trade deal could arrive – possibly as early as March – and fuel a trough for China, the sky is clearing notably for EM currencies and eventually also for EUR/USD.
Separately, GBP has been trading on a soft tone, as uncertainty remains intact whether the UK’s Prime Minister Theresa May will be able to get concessions from the EU in order to secure backing for a Brexit in the House of Commons. We expect EUR/GBP to trade within the range of 0.86-0.89. Next key date could be 14 February where the parliament may vote on an amended deal after May has been to Brussels.
In the Scandies sphere, the SEK had a tough week with EUR/SEK briefly above the 10.40 mark as Swedish data have surprised consistently on the downside; that said, the cross looks increasingly overbought in our view.
DKK has strengthened somewhat vis-à-vis EUR during January and the market has scaled back expectations of a near-term rate; the FX reserve data today should not have a big impact on this. If these show that the central bank sold foreign reserves in January, the market will likely conclude that it took place in the beginning of January, where EUR/DKK traded around 7.4670-80 and disregard it.
The NOK move higher in recent sessions has triggered important breaches of resistance/support levels vs SEK, USD and EUR. That said, momentum indicators are beginning to look somewhat stretched and with a fairly thin Norwegian data calendar in the beginning of this week, we would not be surprised to see the NOK rally take a temporary breather, see also Reading the Markets Norway released this morning.
