Danske Daily: Greek Debt Crisis Talks Resume

EU Finance Ministers resumed crisis talks, putting further pressure on Greece

IMF cuts global forecasts, now expecting growth to reach 3.3% in 2012

President Obama addressed the nation last night in the State of the Union speech

Today holds the FOMC rate announcement, including the new policy guidance

Markets Overnight

EU Finance Ministers resumed crisis talks, after failing to secure a deal to restructure Greece’s private-sector debt on Monday. The ministers put further pressure on Greece to deliver, urging the country to implement tough austerity  measures  and structural overhauls and provide written assurances to its partners that it would meet its promises. This would be a prerequisite for the second bailout programme for Greece, amounting to EUR130bn, being implemented.

IMF slashed its global economic forecasts in its  staff reports published yesterday, expecting global growth to reach 3.3% in 2012. The pace of global economic expansion will thus slow in 2012 from 3.8% last year, according to the IMF, which in its September forecast had pencilled in 4% growth this year. Note that Danske Bank’s forecast is for global economic growth to reach 4% this year as Chinese growth picks up, see Global Scenarios published on 17 January 2012 for details.

US President Barack Obama addressed the nation in his State of the Union speech last night, making his pitch for a second term in office by seeking to draw a contrast with his eventual Republican rival. While refraining from concrete details, he called for new initiatives to help troubled homeowners and legislation intended to discourage companies from shipping jobs overseas.

US stocks slipped in response to negotiations over a solution to Greece’s debt problems coming to a halt late Monday.  Furthermore, yesterday’s mixed bag of Q4 earnings published during the US trading session weighed somewhat on sentiment. Following US close, however, Apple’s results handily beat expectations and overall, earnings reports have surprised on the upside. According to Bloomberg data, of the 74 index constituents that reported results since 9 January, 48 posted per-share earnings that beat projections.

Treasuries ended the day little changed, posting only minor declines yesterday, despite the general tendency for waning risk appetite. However, in the absence of major economic US data releases, investors  are awaiting tonight’s FOMC statement with updated economic forecasts and the new policy guidance.

This morning Japan posted its first annual trade deficit since 1980,  driven by an energy-import surge as nuclear plants shut down and by a shift of manufacturing overseas. The news has caused large swings on the  FX market, sending USD/JPY to levels close to 78. The weakening of the yen, coupled with the strong results from Apple last night, are helping Asian equity indices post gains this morning.

Global Daily

Focus today: Today’s key event is the FOMC meeting where the Fed for the first time will provide projections for the Fed Funds rate based on the individual members’ forecasts. We expect the Fed to forecast the first hike at the end of 2013. First estimate of UK Q4 GDP will surely attract a lot of attention today - especially if numbers are not pointing towards economic contraction as the consensus forecaster predicts. We believe the UK economy actually expanded 0.1% in Q4, an outcome that can send UK yields higher. German Ifo expectations in January are likely to increase significantly in line with the strong increases already seen for German ZEW and PMI. Ifo current situation has stayed stubbornly at high levels, so here we see less room for improvement. US house prices and pending home sales may confirm recent signs of improvement in the US housing market. The World Economic Forum’s annual meeting in Davos begins today.

Fixed income markets: Besides a string of data being released the markets will look at government issuance in Sweden and Germany today. Sweden is expected to tap some SEK2.5bn in the SGB 3.50% Jun-22 and Germany will tap EUR3bn in DBR 3.25% Jul-42. Tonight the attention will turn to the FOMC meeting. We expect the Fed to forecast a first hike late 2013. As Fed funds futures price the first hike around mid-2014, we see some upside risks to US yields in response to the statement and press conference.

FX markets: Today there are several key events scheduled. If we are right in predicting economic expansion in the fourth quarter in the UK, GBP could be in for gains. Later in the day, the FOMC announcement takes centre stage. If the Fed signals the first rate hike earlier than the market expects, it could result in some broad-based USD strengthening. However, given that huge non-commercial aggregate USD long positions have been built, the reaction is likely to be muted.