Key news- Mixed economic data left US markets with modest gains – Dow closed above 13,000
- Markets are up in Asia overnight – with only China lower
- Ireland to hold referendum on the eurozone fiscal pact
- All eyes are on the 3Y LTRO – EUR/USD moves higher ahead of the announcement
- Don’t forget Swedish Q4 GDP before the LTRO and Bernanke’s speech later today
Markets overnight
Mixed economic data left US equity markets with modest gains yesterday – the Dow Jones closing above 13,000 for the first time since 2008. Core US durable goods orders (excluding defence and aircraft) fell 4.5% m/m in January, suggesting that capex spending has decelerated further following a weak Q4. However, a weak durable goods report does not change the underlying story of a maturing US recovery and the rise in the Conference Board consumer confidence index to 70.8 from 61.5 underlines that the improved US job market is making households more optimistic. The US recovery is a key support factor to the market – and will likely remain so going into Q2.
The Japanese PMI fell marginally to 50.5 in February, while January industrial production numbers surprised on the upside – showing 2.0% m/m growth. Markets are generally higher in Asia overnight with only China trading lower.
EUR/USD continues to trade higher ahead of today’s LTRO allotment (about to test 1.35) suggesting that at least the currency market is positioned for a high number. This can also be seen from the spike in the high-beta AUD/USD above 1.08. The consensus expectation thus appears to have moved to the upside within the widely cited EUR300- 500bn range. An outcome within this range also appears to be the expectation on the money market. Note that the EUREONIA (O/N EUR cash broker fixing) on Monday fixed at an all-time low of 18.17bp. For more on the LTRO see page 2.
Enda Kenny, Ireland’s prime minister, has announced that Ireland will hold a referendum on the eurozone fiscal pact. When the news hit the market there was an immediate reaction and EUR/USD was temporarily sent below 1.34. The Irish referendum illustrates the implementation risks that are still associated with the eurozone’s reforms and comes as a reminder that the political process is likely to remain a source of market volatility.
Global Daily
Focus today: The main event today is the ECB’s second three-year LTRO which will likely guide the markets. It is uncertain how much will be taken on the auction. In favour of a high amount is the fact that it is likely to be the last of its kind and hence represents the last opportunity to get very cheap funding for a three-year period. Against a high amount is fear of stigmatisation and the fact that there is already a very large amount of excess liquidity in the system. We expect a result of EUR300-600bn. For more on this,see Research – ECB LTRO II. Fed chairman Ben Bernanke will deliver the semi-annual monetary policy report. He will probably continue to strike a cautious tone on the economy despite the recent improvement in data as the rise in oil prices will provide some unforeseen headwinds. Hence the recovery remains fragile. On the data front today we have euro inflation, Chicago PMI and the second release of US GDP for Q4. Tonight the Fed is due to publish the Beige Book.
Fixed income markets: On the LTRO the market is probably priced for an amount around EUR300-500bn. Hence, outcomes in this region should not have any dramatic impact on the EONIA curve. It is difficult to predict how the market will react to larger or smaller amounts than estimated, as it depends very much on what glasses you are wearing. But the most likely reaction pattern is probably that a higher number is positive for risky assets, with only a minor impact on the curve. In the money market, a higherthan-expected allotment could lead to a minor decrease in EONIA rates and compress the FRA/EONIA spread a tad further. The other major event today – Bernanke’s semi-annual testimony to the US congress (the Humphrey Hawkins) – could be equally important. It will be interesting how large a degree he acknowledges the recent improvement in US data and if he remains complacent on inflation risks. The market is already priced for the Fed being on hold until mid-2014, so we see limited downside to US rates even if Bernanke strikes a dovish tone.
FX markets: Some analysts argue that the ECB LTROs are EUR negative since they basically compare them to QE. We disagree – and it seems that the market also disagrees. Five key reasons why the 3Y LTROs are not currency negative like the Fed’s QE are: (1) the market was short EUR before the LTRO, but long USD before Fed QE, (2) central bank balance sheet expansion is more negative for a economy running a large C/A deficit, (3) there is greater potential for positive currency effects via tighter credit spreads in the eurozone (ECB has managed to narrow sovereign spreads), (4) the LTROs have not led to
a big spike in inflation expectations, and (5) the EUR is positively correlated with risk assets – the USD is negative correlated. A high number should thus lift EUR/USD and the high-beta currencies in general. Note, though that expectations appear to have been building ahead of today’s allotment. Still, a high number would likely lead to further position unwinding and a further EUR/USD rally.
Scandi Daily
Sweden: In Sweden GDP and Riksbank minutes are both due to be released. On GDP, we are expecting an outcome slightly lower than market consensus (-1.2% q/q vs -0.8% q/q) and quite a lot lower than the Riksbank (-0.4% q/q). If we are right, it should again raise the probability of an April cut. Note, despite an outcome in line with our expectations, we would refrain from completely pricing in an April cut at the current juncture since early Q1 data is not yet as negative as we had expected. The minutes are also more interesting than usual since there are two newcomers (Jansson and af Johnick) and we are keen to see how they position themselves vis-a-vis the two distinct camps (Ingves/Parak-ickman vs Svensson/Ekholm) in the monetary policy board. A spike in EUR/SEK on the GDP number would leave good opportunities to position for renewed SEK strength.
Norway: The Norwegian credit indicator and manufacturing production
is not expected to attract much attention on a day with all eyes on the 3Y LTRO.