- Merkel and Sarkozy call for treaty changes to restore investor confidence
- US stocks posted moderate gains after a volatile trading session
- Risky assets are trading lower in Asia this morning on the back of poor economic data
- All focus is on the ECB meeting today – we expect a 25bp cut and the introduction of 24-month LTROs with full allotment at a fixed rate. However, risks are skewed towards further easing. The Bank of England is likely to stay put.
Germany called for EU treaty changes to restore investor confidence in the single currency yesterday. In a joint letter to European Council President Herman van Rompuy, French President Sarkozy and Chancellor Merkel insisted that new rules and commitments be implemented to enforce fiscal discipline. These encompass i) a stronger institutional framework, ii) measures for prevention, including more focus on surveillance and enforcement of economic policies, iii) a reinforced procedure to enforce sound fiscal discipline, including automatic sanction for countries breaching the 3 percent deficit of GDP ceiling, and, finally, iv) a permanent crisis resolution mechanism. With the sweeping measures proposed in the letter, Germany and France have dismissed earlier proposals by Van Rompuy to enforce fiscal discipline by embarking on what would only be a treaty overhaul. Clearly, markets fear that the prospects of treaty changes without quick alterations will extend the process further, as national referendums are likely to be required in several EU countries.
US stocks posted another day of modest gains, after reversing course several times during the day, taking direction from the newsflow out of the eurozone, in the absence of any major US market movers. Also, reports that the IMF was considering a lending programme to halt the EU debt crisis which were later dismissed sparked some volatility. Over the day, the largest gains were seen among financial shares, rising 1.2%, while energy stocks trailed the rest of the market by posting a 0.7% loss.
US bond yields continued lower yesterday, after Treasuries staged a late-session rebound. The 10yr yield fell by 6bp to the lowest level this month.
This morning, sentiment in Asian trading suffers on the back of downbeat economic data releases from Japan and Australia. Data showed a plunge in Japanese machine orders of 6.9% m/m in October (cons.: 0.5%, previous: -8.2%), while the Australian economy shed 6300 jobs (cons.: +10000, previous: +10100) in November.
The FX market saw AUD retreat overnight on the back of the downbeat jobs report, but it later took back some of its losses versus USD. EUR/USD has stayed stable around 1.34 ahead of today‟s all-important ECB meeting, and SEK has also held on to its late-session gains versus EUR.
Global Daily
Focus today: All eyes will be on today‟s ECB meeting. We expect ECB to deliver another 25bp rate cut and acknowledge that risk is skewed towards a 50bp cut. In addition, we expect ECB to ease its non-standard measure by introducing 24-month LTROs with fixed rate full allotment and possibly ease collateral requirements further. We do not expect Draghi to make any firm commitment on bond purchases at this stage. We expect Bank of England to leave its asset purchase programme unchanged at GBP275bn in connection with today‟s monetary meeting, but to announce more QE in January. Finally, US Treasury Secretary Geithner continues his European tour today and is scheduled to meet Italian Prime Minister Monti in Milan at 10:00 CET.
Fixed income markets: The markets showed signs of doubt yesterday, as the news flow ahead of the EU summit became more turbid. It seems increasingly clear that the „grand bargain‟ has not yet been reached and that it is still uncertain whether the outcome of the meeting will provide sufficient cover for the ECB to step up the SMP. We recommend to reduce risk going into the ECB meeting and the EU summit. On back of the recent rally, the risks in terms of market reaction could be asymmetrically skewed to the downside. Regarding the ECB meeting today, we believe that a 25bp cut, 24 LTROs and eased collateral requirements will be a neutral (possibly slightly disappointing) event for the markets. A 50bp cut in the refi or a more explicit announcement to step up the SMP would on the other hand be positive leading to lower rates in the periphery as well as Germany and steepen the EUR swap curve.
FX markets: The ECB meeting will also take centre stage in the FX markets today. According to IMM data, investors are positioned very defensively and a positive risk reaction cannot be ruled out. While this should be EUR positive through the correlation with risky assets, monetary easing will weigh on the single currency through relative rates. Hence, if the ECB surprises by doing more than expected, the largest reaction is likely to be seen in other currency pairs, such as AUD/USD.
Scandi Daily
Denmark: We expect the Danish central bank, Nationalbanken, to lower the different policy rates by 35bp at 16:00 CET today. Hence, policy rates are expected to be lowered an additional 10bp compared to the expected ECB move of 25bp. It will bring the lending rate down to a record low of 0.85% - 15bp below the corresponding ECB rate. The Certificates of Deposit rate –that sets the so-called CITA rates - is expected to be lowered to just 0.30%. The latter indicates that Denmark de facto will move to a zero-rate policy today.
The expected large Danish rate cut is due to the continuous strong inflow into Danish mortgage and government bonds over the past month. In November Nationalbanken bought foreign currency for DKK10.7bn in the market and given the still strong performance of Danish bonds and the continued downward pressure on EUR/DKK in December we forecast that Nationalbanken will widen the already negative spread to the eurozone to mitigate further currency inflow.
There are no scheduled events in Sweden or Norway.