- Market sentiment continued to improve as it became clear that the support for the PSI would be sufficient for Athens to proceed with the debt swap.
- S&P increased 1.0% and Asian equity indices are trading in positive territory this morning. EUR/USD is trading around 1.326.
- Chinese inflation dropped to 3.2% in February, down from 4.5% in January.
- Focus today will be on the US non-farm payrolls and the Greek debt swap
Market sentiment continued to improve yesterday and overnight on reports that support for the PSI would be sufficient for Athens to proceed with the debt swap. The result of the PSI has been released this morning. The participation rate on the Greek law bonds is 85.8%, hence well within the comfort zone for the Greek government. The Greek authorities have said that this will apply to all holders of bonds under Greek law, hence CACs will be invoked. An ISDA meeting is expected to be held today at 14:00 CET (i.e. at the same time as the eurogroup teleconference), so we might have a clear ruling on whether this will treated as a credit event before the weekend.
In China, inflation in February plunged from 4.5% y/y to 3.2% y/y (consensus: 3.4% y/y). While part of the explanation for the large drop is the seasonal distortions from an early Chinese New Year holiday this year, inflation is now substantially within the Chinese government’s comfort zone. However, the activity data released for January and February were mixed. Industrial production and retail sales were both weaker than expected, while the fixed investment data was slightly better than expected. On balance, the Chinese data has increased the odds for an imminent cut in the reserve requirement by the People’s Bank of China.
There were no surprises at the press conference following yesterday’s ECB meeting. The growth outlook was revised down while the inflation forecast was revised upwards. We continue to expect the ECB to keep the refinancing rate unchanged until Q1 14. At the press conference, ECB President Mario Draghi stated that the LTRO II has been an “unquestionable success”. It was the same case for BoE where no changes were announced.
The improving sentiment intensified in the US session. US equity markets increased further overnight. The S&P500 ended up 1.0%. In Asia stock indices are trading in positive territory this morning. Nikkei is up by 2.0% and Hang Seng by 1.1%. US 10-year bond yields climbed 4bp to 2.02%. The yield on US 30-year bonds also rose 5bp. In FX markets EUR/USD increased with risk sentiment and seemed to stabilise around 1.326 overnight. In Scandi both the EUR/SEK and the EUR/NOK are broadly unchanged.
Global Daily
Focus today: Focus today will be on payrolls. We expect a 220K increase in non-farm payrolls in February (consensus 210K). Strong claims and conference board numbers indicate a strong reading today, but distortion to the seasonal adjustment pattern due to the large swings during the financial crisis, which seems to affect payrolls, may pull the figure 25-50K down. We anticipate a 0.1pp decline in the unemployment rate while the consensus expectation is an unchanged 8.3%. Industrial production data are due to be released for several European countries. UK industrial production data should show a moderate improvement in January. Markets will also focus on how Greece will proceed with the debt swap.
Fixed income markets: Optimism about the Greek debt deal and a low Chinese inflation figure have supported risk appetite overnight and returned some moderate upward pressure on long USD rates. This is expected to spill over to the EUR market today.
Elsewhere focus will be on payrolls. We believe that a payrolls reading between 200K and 250K would be relatively neutral for the markets. If we get a strong payrolls report today – i.e. above 250K – the US 10-year Treasury yields might re-test the support levels around 2.04-2.06%. A move through these levels could pave the way for a more decisive sell-off. But that of course all depends on the payrolls report, which is notoriously volatile.
FX markets: As the large debt swap in Greece seems to be heading for a positive outcome, sentiment has been lifted, and we look for further gains this morning. Hence, we see further near-term potential for the high-beta currencies AUD, NZD and CAD, the latter also being supported by the more upbeat tone in yesterday’s BoC statement. Note also that both AUD and NZD have for some time looked oversold relative to movements in other asset classes, according to our short-term models. In Scandies, SEK in particular seems to have some catching up to do. JPY has been the big loser, suffering both due to improving sentiment, data yesterday confirming an unexpected deterioration in Japan’s external balances and comments from Japanese FM Azumi hinting at further BoJ action. The US employment report, which will take centre stage today, is likely to add to the positive sentiment, in our view
Scandi Daily
Sweden: January industrial data (production and orders) are due to be released today and orders are of particular interest considering the very sharp increase (8.6%) in December following a prolonged period of weaker demand. There are indications that this recovery was due to one singe very large order and other anecdotal evidence suggest that orders have continued to decline in early 2012. So, one should probably be prepared for a pretty sizeable negative correction (perhaps 5-6%) in January.