Danske Daily Analysis: February 17, 2012

Key news

ECB and eurozone countries closer to agreement about closing the remaining funding gap for Greece

EUR and stock markets higher on strong US data and hopes that a deal on Greece will eventually be reached

Norges Bank governor Olsen slightly concerned about strong NOK but does not
appear ready to cut interest rates 

Markets Overnight

Market news overnight suggests that the  eurozone finance ministers and ECB have moved closer to an agreement on how to close the  remaining funding gap  in the second bailout package for Greece. It  now  appears unavoidable that Greece will approve a collective action clause, so virtually all private investors will be covered by the PSI-bond swap agreement that is now expected to be announced Wednesday next week.

According to press reports ECB is willing to indirectly contribute with some of the profits on its holdings of Greek government bonds. As part of this  agreement ECB’s current Greek bonds will be swapped for new Greek bonds exempt from the expected collective action clause on existing Greek government bonds, see  Financial Times. According to Die Welt the swap of ECB’s debt could already be completed by Monday. It appears that the eurozone countries are willing to accept a lower interest rate on the emergency loans for Greece.

With strong data released in the US yesterday and signs that  an agreement on Greece is getting closer, risk sentiment has improved since market close in Europe. The US stock market closed higher with S&P 500 finishing up 1.1%. Asian stock markets are also higher across the board this morning with Nikkei and Hang Seng up 1.6% and 0.7% respectively.

In the US bond market bond yields have edged higher and the yield curve has steepened slightly on the back of the better-than-expected US data released yesterday. 10-year US bond yields have increased by about 4bp to 2.0% since market close in Europe. In the  FX market EUR/USD has again moved above 1.31 on the back of renewed confidence that a deal on Greece will eventually be reached. JPY has continued to weaken in the wake of Bank of Japan’s surprisingly aggressive easing moves earlier in the week and USD/JPY is this morning trading slightly above 0.79. In his annual address Norges Bank Governor Olsen did sound slightly  concerned about the strength of NOK, but did not appear ready to cut interest rate at the current juncture. NOK has strengthened in  the  wake of Olsen’s address after market close yesterday and EUR/NOK is this morning trading 7.52.  SEK has continued to weaken overnight after Riksbanken’s 25bp interest rate cut yesterday.

Global Daily

Focus today: In terms of data releases this will be a rather calm day. US inflation figures are expected to show that headline inflation came down from 3.0% to 2.7% as both core and headline CPI are projected to have increased 0.2% m/m in January. UK retail sales data will  probably show lower spending in January compared to December. In the US there  will be focus on a 10-month extension of the payroll tax holiday that we expect lawmakers will vote in favour of today. Angela Merkel meets with Mario Monti in Rome.

The meeting is followed by a press conference scheduled at 13:15 CET. ECB’s Knot (the Netherlands) speaks in London.

Fixed income markets: US data continue to improve and it appears that progress  has been made on the Greek negotiations after officials in several euro area member states earlier this week openly discussed kicking Greece out. Overall, these factors should support risk sentiment. However, risk appetite might be kept in check today as we approach the weekend and there are no data releases of major importance. We maintain our view that long-term swap rates are bottoming around these levels both in the euro area and the US.

FX markets: The dollar correction lost steam as risk sentiment improved and EUR/USD did not manage to sustain a break below 1.30. Recent range-trading is thus maintained and we doubt that a downtrend will be triggered unless the Greek negotiations break down. Given the current stretched EUR short positioning and floored US rates it appears that positive US data surprises are once again able to support EUR/USD via the risk channel. USD/JPY has broken higher but while part of the JPY sell-off can be explained by a widening USD-JPY yield spread, our short-term model signals that spot  is very overbought. This view is also supported by technical indicators - with the RSI reaching levels above 70, suggesting that a correction may be due. 

Scandi Daily

Norway: As expected, there was limited market news in Governor Olsen's annual address. The concern  about the outlook for  the  export sector remains, but there is no direct reference to exchange rate or monetary policy in connection with this matter. On the contrary, Governor Olsen stated: “The question nonetheless remains of whether it is desirable to use monetary policy to accelerate the pace of inflation when the countries around us are in a recession. Even if the krone depreciates somewhat, relatively high cost growth in Norway that could quicken the pace of inflation might lead to a further deterioration in competitiveness. This cannot be the way to go. Moreover, low interest rates over a prolonged period tend to amplify an upward spiral in house prices and lending. Imbalances that build up in credit and property markets can have severe ripple effects further ahead, with a substantial impact on output and employment.”

Whether this will affect monetary policy in the short term remains to be seen, but if anything this is a recognition that the low interest rates over time can also weaken the competitiveness through higher wage growth. If anything, this could reduce the risk of further rate cuts. The Governor also proposed that the Ministry of Finance should base fiscal policy on an annual real return of 3%, compared to the current 4%. In the short term, such a restriction does not involve any significant tightening of fiscal policy, and should thus have limited impact on monetary policy in the short term.