Market movers today
US markets are open again today after being closed yesterday due to Martin Luther King Jr. Day.
In the UK, focus is on the amendments to Theresa May's Brexit Plan B and whether the members of parliament can get behind one or more of them. So far, the problem has been that there is no majority for anything in the House of Commons. The UK jobs report for November is also due, where we estimate both the unemployment rate (three-month average) and the annual growth rate in average weekly earnings (three-month average) were unchanged at 4.1% and 3.3% y/y, respectively.
In Germany, focus is on the ZEW survey data for January. The current situation index has been falling over the past three months, which was likely also the case in January.
Selected market news
Yesterday, US President Trump urged China to make a trade deal in order to support the Chinese economy on the back of the weaker Chinese economic data. On top of the comments from Trump, Chinese President Xi Jinping came with an unusual warning to the Chinese leaders about 'sharp and serious dangers of a slackness in spirit'.
Hence, there is little doubt about the seriousness of the slowdown in the Chinese economy. The IMF cut its global economy forecast for 2019 on expectations of the lowest growth in three years, warning about the threat to the global economy from the trade tensions as well as weak demand in the eurozone economy. Hence, growth was revised down from 3.7% to 3.5%.
The Asian equity market has reacted negatively to comments from Trump and Xi Jinping as well the softer growth outlook from IMF this morning. 10Y JGBs are trading at a yield below 0%. Hence, we expect a negative opening in the European equity markets as well as a positive opening in the bond market with lower yields this morning.
As expected, PM Theresa May's Brexit plan B did not really give us any new information or clarification. It seems like May's strategy is to find out how to get her supporting party, Ulster's DUP, on board, as it would mean bigger support also within her own party. Now, focus is on the amendments, where our focus is on these four topics: (1) a customs union or not, (2) a possible extension of Article 50, (3) preparation of a new EU referendum and (4) new deadlines for Theresa May. The main problem with Brexit is that there is no majority for anything, so it is not a given that any of the amendments will get support from the majority of the MPs. Focus is also on the EU, where we no can no longer rule out a long extension of Article 50, giving time to negotiate the future permanent relationship, which would be the best way to avoid ever having to activate the much-hated Irish border backstop.
Scandi markets
No Scandi market movers today.
Fixed income markets
Yesterday, we witnessed a modest spread widening between the periphery and core EU yesterday most likely driven by some profit taking after a week of strong performance. Furthermore, Spain will come to the market with a new 10Y bond this week. We expect to see strong demand for Spain as we have seen in other syndicated deals this year. There is still a premium in Spain relative to e.g. France. Before the clash broke out between the EU and Italy, the 10Y spread was as low as 50bp in the spring of 2018 and now it is around 70bp.
In Denmark, we saw a modest rise of DKK3bn in the prepayments for the April term. Total prepayments are currently at DKK10bn with two weeks to go. Given the current level for yields, we do not expect a big rise in prepayments in the last two weeks. We expect total prepayments to be around DKK25bn for the April term.
Realkredit Danmark published revised estimates for the upcoming non-callable auction in February. RD continue to revise down the amounts it is selling in the 3Y and 5Y segments. It is selling DKK14bn in the 3Y and DKK11.4bn in the 5Y segment, down some DKK2.1bn and DKK1.3bn, respectively.
FX markets
In the Scandies, both EUR/NOK and EUR/SEK got off to a calm start to the week amid little domestic news and the US holiday. This is also reflected in the Scandi option space where implied FX volatility has declined substantially over the last trading sessions supported by improved risk appetite. As such, the combination of a constructive risk environment and falling realised volatility could continue to push down implied vols in the short term. In addition, the risk of political uncertainty in Sweden has declined with the new government in place. We have generally recommended to sell 3M (NYSE:MMM) EUR/SEK straddles, but given the latest volatility move, we would recommend clients to consider taking profit.
On NOK, the domestic data calendar has been very thin over the last weeks but this will change with Thursday’s Norges Bank meeting and Friday’s business confidence data from SSB. Generally, we expect both releases to support our case of being long NOK – see Reading the Markets Norway, 21 January 2019 – and if global risk sentiment holds up, we would not be surprised to see a test of 9.70 (figure) and the set of previous high/lows around 9.69.
EUR/GBP is trading slightly lower after UK PM, Theresa May, presented her Plan B for Brexit. As such, it did not offer much news in terms of the future path for Brexit. All options are still on the table, including a second referendum, which the Labour party according to the media is said to be proposing to parliament. Voting on Plan B and other amendments will take place on 29 January. With an extension of Article 50 looking increasingly likely and parliament seeking to take over the Brexit process and thereby reducing the risk of a ‘no deal’ Brexit, the post-Brexit outcome distribution for EUR/GBP looks increasingly skewed towards the downside. Appetite for GBP has generally improved and implied GBP FX volatility (Brexit risk premium) has declined significantly. We reckon that the range for EUR/GBP may have shifted lower and we now see the cross within the 0.86-0.89 range near term (previous range: 0.88-0.9060).
