Market movers today
The main event today will be the release of the FOMC meeting minutes in the US. We will be interested to hear the different stances within the Fed on further hikes now it has hinted it is 'patient' about raising rates again. Furthermore, we will monitor any insights it might have on how it plans the balance sheet reduction. See FOMC review: All we need is just a little patience , 30 January 2019.
Potential Brexit news as May meets Juncker in Brussels today. May's camp has played up, whereas Juncker has played down the importance of the meeting.
Selected market news
Market anxiety eases further. European and US equity markets closed essentially flat. Asian bourses are trading up. The S&P 500 closed up 0.15%, which drove down its derived measure of implied volatility, the VIX index to 14.88, which is the lowest level since October 2018. The volatility index is often used as a barometer of market anxiety. Treasury yields fell across the curve with the long end underperforming.
Elections driving trade results. Bernie Saunders announced he will run in the 2020 U.S. presidential race. The beginning of presidential election campaigning is a key driver towards a deal in trade negotiations between the US and China. Incidentally Trump is quoted as saying that the 1 st of March is not a "magical date." The will to a deal is evident. Bloomberg further reported that the US wants the Yuan tied into negotiations, in order to counter potential currency devaluation.
Prime Minister Theresa May heads for Brussels today to deal with Juncker. Her trip follows yet another defeat, as there was no support for her Brexit statement (the hard Brexiteers abstained). While the vote was only indicative and not legally-binding, it has probably made life more difficult for May, as she no longer can show she has a united party behind her. EU is not willing to negotiate and make concessions if they do not know whether it will be sufficient. May has promised another vote by the end of February but she is unlikely to have anything new to bring forward then.
We have to get very close to the 29 March deadline (remember there is an EU summit on 21-22 March) or a small majority in the Commons will force May to ask for an extension of Article 50 by the end of this month. Pressure is rising on all. We stick to our view that the two most likely outcomes are May's deal passing eventually (40%) or a second EU referendum (30%). A no deal scenario would probably only happen "by accident" and we attach a 15% probability to that scenario.
European tier 2 macro prints were mixed. German ZEW expectations edged up from -15.0 to -13.4 in February in a sign of stabilisation. A recession leaden Italy suffered weak industrial orders in December with orders declining -1.8% m/m. The print points to protracted weakness in Q1.
Scandi Markets
In Denmark, today brings consumer confidence figures for February. The indicator increased slightly in January after falling for six months solid from its peak in June 2018. This weakness may seem odd at a time of rising unemployment, low interest rates and rising housing prices, but has been driven primarily by a less positive view of the economy as a whole. This makes some sense, with the trade war between China and the US breaking out just before the summer, and Brexit grabbing more and more of the headlines as the deadline looms. We expect the indicator to climb slightly further to 5.0 in February.
In Sweden, the debt office forecast will be released. We expect an upward revision to the Debt Office’s new borrowing forecast as the outcome ran behind the forecast in the final quarter last year and as budget proposals are less financed than before. Hence, we expect signals of increased funding primarily via increased issuance of nominal bonds.
Fixed income markets
Italy came under pressure yesterday as industrial data came out very weak for December (industrial sales down 7.3% y/y). That said, losses were limited as risk appetite in general improved. After recent ECB comments the market is increasingly expecting further ECB easing to support BTPs (LTROs/forward guidance). However, the weak data might spark further nervousness ahead of the rating verdict by Fitch (BBB/negative outlook) on Friday. We do not expect a downgrade as Fitch is likely to see the current low/negative growth rates as temporary as the EU Commission did earlier this month. For more see our Government Bonds Weekly: Don’t worry about the Spanish election 6 it is a positive market event!, 15 February.
Today, Denmark will be tapping the new 10Y benchmark bond (DGB 11/29) and the 5Y benchmark bond (DGB 11/23). We look for good demand, especially for the 2023 paper. The paper has not been tapped since the beginning of December and with plenty of excess liquidity in the market, we would expect good demand. But also the 10Y bond should be more interesting for investors after the somewhat weak introduction in January. The drop in yields has taken duration out of the Danish callable market and is forcing investors towards DGB’s and long-dated DKK swaps.
Germany will tap EUR 4bn in the new OBL 4/24 bond. In France, the new 30Y OAT was received well by investors with a book in excess of EUR 31bn, and the 30Y segment of the France curve performed vs core for a change. The curve 10s30s remains very steep in France.
FX markets
Yesterday’s inflation data was disastrous for both the Riksbank and the SEK, as both CPIF and CPIF ex energy came in 0.4pp below the Riksbank’s forecast. Even though some components could bounce next month (e.g. airline tickets and charters, that were down - 30.8% and -18.6%, respectively), the fact remains that this was a huge miss. Although Board members are said to be less stressed about single month outcomes, this miss will surely matter, especially if the gap remains until the April meeting. The market immediately priced out 3bp following the miss, and RIBA is now at 15bp for 2019. This outcome lends support to our view that we will not see a Riksbank hike during 2019. The SEK took a serious hit following this, and rightly so. We are still having a hard time finding The sell-off in SEK has highlighted the strategic attractiveness of a long NOK/SEK position – especially in the current environment where oil has traded light. Consequently, EUR/NOK has fallen back to the low 9.70s. We remain long NOK/SEK and see a potential for an even further move higher especially driven by the NOK-leg going forward.
USD under pressure last night after the US called for a stable CNY as part of trade talks which helped ease some of the pressure on EUR/USD arising after recent ECB talk of TLTROs. We still see EUR/USD as a range around 1.15 and regard the cross a strategic buy on dips with triggers for a sustained move higher being an eventual stabilisation in euro-zone data and a trade deal – even if the positive impact of the latter on EUR/USD may be dented somewhat initially by a US short-term growth boost as well. Focus today on FOMC minutes today: we still think the Fed is priced too dovishly for 2019 which should hold a hand under USD near term
