Market movers today
It is another quiet day in terms of data releases, and hence markets will focus on the implications of the EU vote in different countries.
In the UK, both the Labour and Conservative parties are digesting the poor EU elections. Signs from the labour Party of supporting a second referendum will be interesting and the leadership candidates from the conservative party are lining up, with Brexiteers such as Boris Johnson among the favourites, prompting a weakening of GBP.
In Italy, EU is rumoured to launch an EDP procedure against the country in early June over the 2018 fiscal outcome , which could prompt reactions from the Italian government.
The Hungarian central bank (the MNB) will announce its policy rate decision. We expect that this time the MNB will again leave the rate unchanged at 0.90% despite core inflation climbing to the upper bound of the central bank target on brisk economic growth and double-digit wage expansion. However, it may implement another hike of the overnight depo rate and further cuts in FX swaps as a tool for liquidity tightening.
Selected market news
Trading in Asian stocks was thin and gains moderated following advances of the European stock market. The calendar was light and the US market was closed for Memorial Day, and also the UK market was off. Europe saw relief on the EU parliamentary election results, while worries on political withstand in the EU eased.
Markets did not move significantly on US President Donald Trump's announcement that the US was not ready to reach a trade deal with China. Trump also added that tariffs on Chinese goods "could go up very, very substantially, very easily." Yet, Japan's minister of economy said that Trump signalled during his visit to Japan that there could be an announcement on trade in August.
A Bloomberg story pictured yesterday afternoon that the European Commission is considering proposing a disciplinary procedure against Italy next week over its failure to rein in debt, which could impose a EUR3.5bn fine. The step could come as part of the EU's regular budget monitoring process, most likely on 5 June, and would mark an escalation of Rome's budget tussle with Brussels that roiled markets at the end of 2018. Yet, the final decision on further fines may not come for months, after Italy is given time to correct its finances. The EU has never fined a country over its budget. The news weighed heavily on the EUR, as the EUR/USD traded 0.3% lower this morning from its highs yesterday, while Italian yields rocketed.
Scandi markets A lot of Swedish data today. First, business- and consumer confidence (NIER). In a general, perspective manufacturing confidence has remained relatively healthy not least as a result of (still-) elevated order books. New orders though have dampened somewhat of late which seems to be consistent with developments in Germany and other European markets.
Services confidence surprisingly enough has been lower for quite a while even though we have seen some improvement in the latest couple of months. It is worth noticing that private businesses’ hiring plans are gradually moderating. This is also confirmed by hard data, where actual employment growth has softened a bit compared to peaks.
From Sweden’s April trade balance, we expect a SEK3bn surplus. As a matter of fact the trade balance showed a deficit in 2016-2018. This year has started better with an accumulated surplus of SEK16.6 bn. This in turn reflects a relative slow-down in imports. In Norway, Statistics Norway will publish the quarterly oil investment survey. There are clear signs that the main reason why manufacturing and the economy as a whole have performed relatively well during a period of global weakness is growing activity in oilrelated industries. The survey is therefore crucial for the economic outlook this year and next, and a key factor in our view of how interest and exchange rates will move over the next couple of years. We expect the estimate for oil investment this year to be around the previous estimate of NOK171bn, which equates to growth of around 13%. The figure for 2020 is very uncertain, but we should ideally see something in the region of NOK165bn if we are to have further faith in increased oil investment next year.
Fixed income markets
Today is the last day of the Danish May refinancing auctions and most Mortgage Institutions will be in the market selling in total DKK49bn in FRNs with maturities concentrated in the 3y segment. FRNs were also auctioned yesterday and Friday, although in smaller amounts, and we have so far seen healthy demand from investors with spreads to non-callable bullets at 3-6bp, which is in the lower range of our expectations before the auctions, and close to where the secondary market trades. The latest significant auction of FRNs in May 2018 saw spreads of 7-10bp.
BTPs came under strong pressure yesterday as Bloomberg ran a story that the EU Commission June 5th will consider a disciplinary procedure over Italy’s failure to rein in debt. An Excessive deficit Procedure is a lengthy process, but if the story is true, the standoff between Italy and the EU that we had expected in the autumn could start much earlier. Noteworthy, neither Spain nor Portugal underperformed anything significant yesterday. It underlines that the hunt for carry is still the dominant fixed income theme and the risk of contagion is small.
FX markets
The biggest news for EUR/USD yesterday was that EU is rumoured to prepare to launch EDP against Italy in June. It took EUR/USD 10 pips lower, which to us suggests that it would take a significant deterioration around Italy’s fiscal situation to really move EUR/USD – EU retaliatory measures are not a market mover. Looking further ahead to the rest of the week and into next week, the big question for the market is whether the current dovish Fed pricing is justified. To answer, the market needs more data and updated signals from Fed following last Thursday’s weak PMIs. Fed’s Clarida might provide more clarity on Thursday.
In the Scandi sphere, “Why is the NOK so weak?” has become a puzzle for investors, corporates and policy makers – especially over the last year with higher oil, the economy outperforming peers and Norges Bank hiking rates as the sole G10 central bank. This morning we have published an FX Strategy piece of the same title in which we take a deep dive into NOK FX economics in trying to find the answer. For our findings please, see the full piece here FX Strategy - Why is the NOK so weak?, 28 May 2019.
Finally, some SEK-related data worth monitoring today (see Scandi section above), where especially NIER’s business survey will be scrutinized for signs of further weakening in the manufacturing sector. Not a major market mover, this still has the potential to move EUR/SEK some figures in either direction.
