Key news- The positive sentiment continues in the equity markets – S&P500 rose 0.6% on the back on US economic data and a solid Spanish government bond auction yesterday
- The Asian markets have followed sentiment in the US with rising stock prices and Nikkei is up 0.7% this morning
- Major FX crosses have been range-bound this morning. NOK breaks through parity with DKK
Markets overnight
The EU yesterday agreed to provide capital more quickly for the planned permanent bailout fund (ESM) in order to strengthen the EU’s defences against the debt crisis. Hence, EU governments could potentially pay the first two annual instalments into the ESM and complete the capitalisation in 2015 – a year ahead of schedule. More will follow today; however, a discussion to increase the fund was taken off the schedule.
The US equity markets continued to rally, while Treasuries slid, as borrowing costs fell for Spain and France and US jobless claims matched a four-year low. The S&P500 rose0.6%, taking it close to a four-year high.
Spain and France took advantage of the LTRO from the ECB and sold a combined EUR12.5bn yesterday. The Spanish auction went particularly well with solid bid-tocovers. Hence, support for both Spain and Italy was strengthened yesterday. Furthermore, ISDA stated that the Greek credit default swaps will not be triggered given what we know so far. Finally, initial jobless claims fell 2,000 to 351,000 last week – less than economist estimates, but indicating that the US economy is slowly getting better.
Given the positive sentiment in the US equity market, Treasuries slid and yields rose in the long end of the curve by 5bp.
Asian markets have followed the positive sentiment from the US market as the region’s equity market continued its rally and is set to extend its longest weekly positive streak on record, after US jobless claims fell and EU leaders agreed to speed up the process regarding setting up the permanent bailout fund – ESM.
In the FX market, it is has been a fairly dull morning with the major crosses dominated by range-trading: EUR/USD is trading around the 133 level, while USD/JPY is trading around the 81 level. NOK continues to strengthen, and moved below parity with DKK. This has not happened since 2003. SEK is also gaining but at a much more modest pace.
Global Daily
Focus today: The calendar is extremely thin today with no real important data releases scheduled. German retail sales are due out this morning at 08:00 but after that there are no numbers of real interest. The oil price rose again yesterday and should continue to be monitored closely as a further sharp move higher could start to put a brake on the global recovery – mostly in the US. The EU summit continues today but there will be no new real messages that can move the markets, we believe.
Fixed income markets: US 10Y Treasury rates attempted, but failed, to break important resistance levels around 2.04-2.06% yesterday. With risk sentiment in fairly good shape overnight and oil higher, the market might make another attempt today. At least these are important levels that should be watched in the coming days, as a break through these levels could establish a higher range for long USD rates and push long tender EUR rates higher as well.
Elsewhere there is little to focus on today. The market will start to look ahead to next week’s important events: the ECB meeting and the US payrolls report.
FX markets: EUR/USD has lost some momentum after the latest comments from Bernanke. However, we still see upside for the cross with risk well supported after the European LTRO and with oil prices once again above USD125/bbl. Note that USD/JPY is starting to react to the better risk environment and the cross is currently trading at its highest level since May last year. In fact, EUR/CHF is one of the last currency crosses that have not reacted in the normal way to the better risk environment.
Scandi Daily
In Denmark currency reserves will be published. Given recent movements in EUR/DKK, we expect a fairly unchanged currency reserve. Furthermore, there are ongoing negotiations regarding a fifth bank package in Denmark. This package aims to support the agricultural sector, where the government will create a bank that can lend to farmers. The size of the bank is expected to be DKK3bn with a base capital of DKK0.3bn. The new bank package also includes a plan to buy loans from FIH bank worth DKK15-17bn. This mainly relates to commercial real estate loans and the loan portfolio will be bought by Finansiel tabilitet. We do not know the final details of the new bank package, but from what we know so far, this should be supportive for the agricultural sector and the SMEsegment in Denmark.
This might have contributed to the positive pricing at yesterday’s refinancing auction of non-callable bonds, where the 1Y DLR mortgage bonds were sold with a spread of 12-13bp to Nykredit and Nordea. Furthermore, there was a very solid bid-to-cover. Hence, investors chose to ignore the possible rating action from Moody’s, where DLR could lose its Aa-rating in a worst-case scenario.
In Norway it is time for retail sales. We expect a small recovery in sales of 0.3% m/m after a drop in the same size in December. However, the main focus in the Norwegian market is now the currency with EUR/NOK trading at its lowest level since 2003. We still see value in the NOK given the high oil price and the strong surge for carry in global FX arkets. A stronger NOK might start to fuel high rate cut expectations. The Norwegian fixed income market has until now been surprisingly unaffected by the strong NOK. But we are approaching a currency level where the risk of Norges Bank taking action – or at least the market pricing it – is rising.