- Summer calm continues in the markets with little market action overnight.
- Volatility in the financial markets continues to decline and is now close to multi-year lows.
- Minutes from Bank of Japan’s monetary policy meeting indicate that the bank is contemplating further monetary easing. This has weakened the yen and lifted Japanese stocks this morning.
The summer calm continues in the market – both in terms of market volumes and market action. Once again the US stock markets ended their trading session more or less flat. This morning the story is the same in Asia. Stocks are more or less flat but it will be a busy day today in terms of macroeconomic releases, which might wake up the markets.
The summer calm is also reflected in stock market volatility: yesterday the VIX volatility measure fell below 14, near the lowest level of the year. We are seeing the same trend in the global fixed income and FX markets. In fact, in terms of currency volatility we are now close to year lows, which is also the lowest level since the outbreak of the present crisis in 2008. The low level of volatility can either be seen as a contrarian indicator implying that we could soon see a market correction or it can be seen as a comforting sign that the measures implemented by central banks around the world are beginning to have an impact.
This morning the Japanese yen has weakened a bit on the back of the release of the minutes from the Bank of Japan’s July monetary policy meeting. What triggered the selloff in the yen was the news that the bank had considered new measures to expand monetary stimulus. The news also helped to lift Japanese stocks. The Bank of Japan has become somewhat more aggressive in its communication about monetary easing this year, which certainly helps explain why the yen has been one of the worst performing G10 currencies this year.
Global Daily
Focus today: After a slow start to the week, the data calendar is packed with releases today. In the euro area, we estimate a fall of 0.1% in Q2 GDP although Italian and Spanish figures have been slightly better than expected. It is likely that Germany managed to avoid recession in Q2 but it is heading for negative GDP growth in Q3. The German ZEW index for July is likely to reflect the improved market sentiment over the past couple of weeks and recover slightly.
In the UK, CPI data are likely to show that inflation slowed to 2.3% in July. The key release in the US is retail sales, which is expected to rebound in July rising 0.3% m/m after a run of weak months. We expect this gain to be driven by strong core sales, up 0.6%, as chain store sales were upbeat while car sales and sales from gasoline stations continue to be a drag.
Fixed income markets: Overall the European bond markets remain fairly directionless. Despite the busy calendar today we expect limited impact on the markets unless there are large deviations compared to expectations. Rather, the markets await more signals on how Spain possibly could seek financial aid – something we might not learn more about in the coming days. Today, the Danish Debt Management Office will be tapping in the DGB 2.5% Nov-16 and the DGB 4.5% Nov-39.
While we still see solid demand for Scandinavian assets in the current markets, we do not expect large interest at the auctions. Even given that the DGB 2.5% ’16 is the first point with a positive yield on the curve and the relative curve steepness is an argument for switching shorter maturities into this we expect only very little interest for this bond. We would expect to see the most interest in the DGB 4.5%’39 as this is an opportunity to add duration.
FX markets: It has been back and forth overnight in the FX market and we are almost back where we ended yesterday afternoon as market optimism faded after a strong opening in the Asian trading session. Initial gains in high-beta currencies, AUD, NZD and CAD, were reversed while USD/JPY as the exception held on to the increase after minutes from the Bank of Japan meeting in July released this morning showed that the central bank does not rule out further monetary easing.
Scandi Daily
Sweden: Today's data on June industrial production and July inflation both have potential to be market movers. We expect industrial production to print -0.1% m/m, in line with German production, which means that there is a slight correction to the 3.5% surge seen in May. That forecast, however, suggests that production is stabilizing. For the negative trend to continue a drop close to 3% is needed and such an outcome is also likely to weigh on sentiment as it would suggest that Sweden's export industry is not immune to a deteriorating German/European economy.
Swedish July inflation is likely to show a drop of 0.4% m/m. That would bring CPI down to 0.6% y/y and underlying CPIF to 0.7% y/y, indeed showing a significant spread for instance to German and French inflation. As usual in July, the main contributor pulling down prices will be clothing sales but this time we also expect sharply falling electricity prices to be important. The outcome is expected to be only marginally below Riksbank's forecast. Hence, a sizeable deviation in either direction is needed to have any implications for Riksbank action.
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