Market movers today
In the Euro area, it's quiet on the data front ahead of 'Super Thursday', but markets will stay tuned for any policy hints from ECB President Draghi when he opens a farewell colloquium in honour of the departing Chief Economist Peter Praet at 09:30 CEST.
In the UK, European elections kick off today. Normally, the elections would not be a major market mover but, given Brexit, it is more interesting this time, not least because the Conservative Party is likely to suffer a heavy defeat and Nigel Farage's new Brexit party may be the biggest party of all. In our view, it is likely this would increase pressure on Prime Minister Theresa May to resign. Furthermore, CPI inflation for April is also on the agenda.
In the US, markets will keep an eye on the FOMC minutes from the May meeting set to be released later in the day. As the Fed has clearly communicated that it expects to be on hold for some time, focus will likely be mainly on the reasoning behind the surprise cut in the Interest on Excess Reserves (IOER).
In Scandinavia, the Riksbank will publish the first Financial Stability Report for 2019 (see next page).
Selected market news
Global financial markets are watching every little aspect of the renewed trade dispute between the US and China, which currently shows no sign of ending. Yesterday, US equity markets saw some relief on the back of a decision from the Trump administration to issue a licence that will allow US companies to keep doing business with Huawei for the next three months in a bid to contain the fallout from the export restrictions on the Chinese telecoms equipment maker. However, recovery in Asian equity markets fizzled out following news that the Trump administration is considering curtailing the flow of American technology to China's top makers of surveillance gear.
In the UK, Prime Minister Theresa May yesterday proposed to give Parliament a vote on whether to call another referendum to ratify Britain's divorce from the EU conditional on MPs backing her overall withdrawal bill first. However, the proposal seemed to have little effect in winning over sceptics, with prominent Brexiteers, such as conservative MP Boris Johnson and Labour Party leader Jeremy Corbyn, and May's Northern Irish allies condemning her proposal. Indeed, consensus is increasingly shifting towards a scenario where either Brexiteer Boris Johnson or Labour's Corbyn is set to take the UK through some form of Brexit and both are seen by markets as pound-negative. In reality, we will not have more certainty before May steps down and domestic politics is reshuffled. Either candidate may indeed show to be more pragmatic but for now a bit more pound volatility has been introduced.
Scandi markets
In Sweden, the Riksbank will publish the first Financial Stability Report for 2019 at 08.30 CEST with a press conference at 10.00 CEST. We expect to see continued focus on household debt, risks in the real estate market and on LCR requirements in the banking sector. Industry capacity utilisation for Q1 is due to be released at 09.30 CEST. Although both events are interesting, we do not expect them to be market movers.
Fixed income markets
There was a decent rally in the periphery yesterday after some turbulent days with underperformance in Italy in particular. The main driver of the spread tightening was a general improvement in risk sentiment, where equities rallied as well. The geopolitical uncertainty is still very visible in the market but comments overnight from China indicate that they are ready to “continue talks” with the US. Part of the underperformance in the core-EU was also related to the EUR5.9bn issuance of a new 20Y Dutch green bond. This had to be ‘digested’ by the market even though there was solid demand for it with a bid-tocover of 3.5.
We are still a bit reluctant to enter the long end of Italy ahead of the EU parliamentary elections, and recommend for those investors that can buy Italy to stay in the front-end. We still prefer Spain and Portugal even though spreads are tight and 10Y Spain is again trading below 1% on the outright level.
Today, we have supply coming from Germany, where the German Debt Agency is selling EUR3bn in the 10Y benchmark There is also an auction in Denmark and Sweden. Denmark will tap in the 2Y and 10Y segments. We recommend domestic life insurance and pension funds to EU govs (preferably Germany) and to use the cheapness of the DKK relative to EUR to buy DGBs. See more in FI Strategy Denmark - DGB auction: buy DGB 11/29 vs DBR 02/29.
Sweden will tap in the 5Y and 13Y segments with SEK1bn in the 5Y segment and SEK0.5bn in the 13Y segment.
FX markets
There was not much of a warm welcome from the GBP on the back of PM May’s improved deal, presented yesterday. The GBP has been trading increasingly weakly as the consensus call is shifting towards a scenario where either Brexiteer Boris Johnson or Labour’s Jeremy Corbyn is set to take the UK through some form of Brexit and both are seen by markets as pound-negative. In reality, we will not have more certainty before May steps down and domestic politics is reshuffled. Either candidate may indeed show to be more pragmatic but for now a bit more pound volatility has been introduced.
In FX Strategy - Policy inaction keeping a lid on EUR/USD, we stress that EUR/USD is in the hands of policy makers. The current policy inaction will keep EUR/USD in the current range, while it creates downside risks to our 1M and 3M (NYSE:MMM) forecasts of 1.12 and 1.13 if it further deteriorates risk sentiment. If policy makers in the US and China step up and manage a trade deal and/or ease monetary policy it would create the foundation for a higher EUR/USD. This is not a story for the short-term, though.
We have long argued a bullish strategic view on the NOK from relative growth, rates, oil and fundamental valuation. Recently, that view has been challenged by the escalating trade war, global economic data falling short of expectations and a dovish Riksbank triggering broader-based Scandi weakness. While we still look for a lower EUR/NOK, an alternative way of playing a stronger NOK is via the AUD. For more information see FX Trading Portfolio – short AUD/NOK: the global trend favours NOK, not AUD.
Challenging times for the TRY are not even close to being over. When the Turkish central bank cut the TRY rate by 150bp to 24% in the swap market yesterday, the TRY fell immediately. High rates in Turkey have already caused contraction in economic activity and the state continues to face a trade-off: whether to keep the TRY and banking sector stable and inflation under control or try to revive the economy.
