Market movers today
A quiet start to a very busy week. Euro money and credit data is the main data of interest today. M3 growth is expected to rise slightly from 3.7% to 3.8%. Later today, ECB President Mario Draghi will speak at the EP but is unlikely to send any new signals compared to the ECB press conference last week.
Instead, all eyes this week will be on the high level US-China trade talks on Wednesday and Thursday. Negotiations are entering a crucial stage, where the thorny issues are likely to come up.
Other events this week will be: Brexit vote on Tuesday on Prime Minister Theresa May's Brexit Plan B. See today's Brexit Monitor: pressure is mounting . FOMC meeting Wednesday, Chinese PMI manufacturing Thursday (NBS) and Friday (Caixin) and US employment report and ISM manufacturing Friday, read more in Weekly Focus .
Selected market news
On Friday, European markets digested the messages from the ECB meeting on Thursday. European yields traded broadly sideways while equities ended in the green across the globe. The EURUSD ended the day around one big figure higher. This morning, positive sentiment dominates the Asian markets, which are generally trading in green.
The partial US government shutdown has ended, at least for three weeks, as US President Trump has given up the wall funding for now. Trump tweeted that the agreement was 'in no way' a concession to the democrats. Talking to the WSJ over the weekend, he said that he sees a less than 50/50 chance of a border wall by the deadline, which could force him to use emergency powers.
After mixed signals from Treasury Secretary Steven Mnuchin and Secretary of Commerce Wilbur Ross on Thursday, the US-China talks on Wednesday-Thursday will be key. China's top trade negotiator, Vice PM Liu He, will meet with US Trade Representative Robert Lighthizer and Mnuchin in Washington. The talks are likely to centre on some of the tough issues in the trade negotiations, such as the Made in China 2025 plan, protection of intellectual property rights (IPR), forced technology transfer and non-tariff barriers.
On Friday, we also had a few ECB speakers out. Most prominent were board member Benoit Coeuré and French central bank governor Villeroy who both stressed that a new liquidity operation would be due to a monetary policy reason. Furthermore, downward revisions of ECB projections were probable. On a side note, Coeuré, who has been mentioned as a potential candidate to replace ECB President Mario Draghi in October, replied rhetorically, 'who wouldn't' accept the ECB presidency if asked.
The German IFO business climate took another dip in January to 99.1, driven mainly by the weaker business expectations dropping from 97.3 to 94.2. Similar to the PMI release on Thursday, the Ifo is signalling that the German economy had a soft start to the year and that a rebound is not yet in sight. See Research Germany: The epicentre of the euro area slowdown , 27 January.
Scandi markets
We have an interesting week ahead of us with Riksbank speeches and NIER business and consumer confidence. Today, however, Riksbank Deputy Governor af Jochnick is due to speak about monetary policy.
Fixed income markets
Euro fixed income markets will focus on the EU GDP growth figures by Thursday and Inflation/ PMI’s on Friday. If both sets of data confirms the slowdown, it will add pressure on the ECB and lower Bund yields by the end of the week.
We are still in the new issuance season, where we lack both Austria and Finland. Both countries are expected to come to the market in Q1. On top of this, Greece is likely to come to the market with a 5Y benchmark as the PM Tsipras has secured a majority for the Macedonia Name deal.
There are plenty of redemptions coming from Spain and Italy this week. However, the Italian bond is not held in the PSPP portfolio, but in the SMP portfolio, and thus there is no reinvestment into Italy from the redemptions this week. However, we expect the ECB to hold some of the Spanish bonds in the PSPP portfolio and nothing in the SMP portfolio as the bond was issued in January 2016. Hence, again a factor that is supportive for Spain and SPGBs relative to BTPS.
FX markets
In our view, 1.15 remains the attractor for EUR/USD and with no new signals likely from the Fed on Wednesday the cross should broadly stick to recent ranges. Focus also on trade talks due to resume in Washington on Wednesday: it is not clear-cut that positive news will be USD negative short term given the recent negative impact of the war on tariffs on US activity lately, but eventually we expect a deal to benefit EUR and CNY more than USD this year.
GBP has performed strongly over the past two weeks as the risk of a ‘no deal’ Brexit appears to be declining. We find the rally in GBP fair given that the post Brexit outcome distribution for EUR/GBP looks increasingly skewed towards the downside. Focus for GBP this week will be on the House of Commons’ voting on Prime Minister Theresa May’s Brexit Plan B (and amendments) which takes place tomorrow. See Brexit Monitor: Pressure is mounting. We look for EUR/GBP to trade within the 0.86-0.89 range short term. Technically, EUR/GBP looks increasingly oversold with the 14 days relative strength index (RSI) trading below 30, and we reckon that it would require more than the approval of the Cooper amendment - either in the form of higher probability that a deal could be passed soon or a call for a 2nd referendum - to trigger a break below 0.86 at this stage. Weak retail sales data set the tone for EURSEK on Friday and the cross closed the week above 10.30, unable to benefit from otherwise better risk sentiment. Today the trade numbers is a potential market mover. Crosschecking against interest-rate differentials, which have stayed relatively flat over the last few trading sessions, EURSEK is now at ’overbought’ levels.
Monthly VAT payments are due in Denmark today, which will lower excess liquidity temporarily to around DKK210-220bn until the start of February where it should surge back to the DKK240-250bn range. We could thus see a slight temporarily relief in the downwards pressure on front end DKK rates and EUR/DKK FX forwards this week. For EUR/DKK spot global risk sentiment will be important. If equity markets continue to recover it should continue to trade with safe distance to the likely 7.4670-80 central bank FX intervention zone.
