Market movers today
Today's key event will be the Bank of England meeting. Amid the ongoing Brexit uncertainty, we expect the Bank of England to be on hold until November. The new forecasts are likely to show a downward revision to the growth and inflation paths.
Watch out for Brexit headlines, as Theresa May is expected back in Brussels today, trying to garner support for concessions on the Irish border backstop (see Brexit Monitor: May has two and half weeks to renegotiate the backstop , 30 January) . She is scheduled to meet Commission President Juncker at 11:00 CET.
In Germany, yesterday's factory order data pointed to tentative signs that the car sector recovery started to pick up speed at the end of 2018. It will be interesting to see whether today's December industrial production data shows a similar trend and whether the big drop in pharma production in November has reversed (see Research Germany - The epicentre of the euro area slowdown , 27 January).
Later in the morning, the European Commission will also release its new economic forecasts. Markets will particularly pay attention to the extent of cuts to the euro area growth prospects.
In Sweden, house prices and budget balance figures for January are in focus, while industrial production data is due out in Norway and Denmark.
Selected market news
According to The Telegraph (paywall), PM Theresa May is preparing to delay the second vote on her Brexit deal from next week until the end of February (which means Article 50 deadline is likely to be extended, at least for technical reasons, as the UK would need more time to pass the necessary legislation), as PM May is still negotiating with the EU (although EU Council President Donald Tusk's comments yesterday have not made life easier for May, see YouTube clip). Labour leader Jeremy Corbyn has also presented new demands for supporting a Brexit deal. Corbyn still wants a permanent customs union with the EU and wants the UK to stay closely aligned to the single market (see all demands in The Guardian ), something the Conservative Brexiteers will never support. With less than two months to go, the UK remains divided and pressure is increasing. Note that Theresa May is expected to visit Brussels today.
US equities were softer yesterday with NASDAQ taking the lead down on weak earnings reports. The market also continues to focus on the trade war concerns and the risk of a new government shutdown looming. The risk of the latter is still high given that the State of the Union gave little hope of a compromise. The weaker risk appetite gave some support to US Treasuries and EUR/USD edged lower. The negative sentiment has been carried over to Asia and Nikkei is down this morning. Note that Hang Seng is closed due to Chinese New Year. Yesterday, the strong demand for European bonds continued as Italy sold EUR8bn in a new 30Y bond and attracted bids for more than EUR41bn.
Scandi markets
Norwegian Manufacturing activity has shown no signs of weakness despite the global slowdown. This is probably due to a strong pickup in oil-related industries. As all leading indicators are improving, we expect manufacturing production rose 0.3% m/m in December, taking the quarterly growth to a solid 1.4 % in Q4.
Fixed income markets
The Italian EUR8bn 30Y syndicated deal (slightly bigger than expected) yesterday saw an impressive order book in excess of EUR41bn. Despite the strong book, the yield on the BTPS ’48 rose close to 10bp during the day. However, in our view, it still seems odd that the 1Y BTPS trades with a positive yield when all other 1Y IG-rated European government bonds trade with a negative yield and the short BTPS can be funded at around -40bp.
Today, France will tap up to EUR9bn in the 7Y, 11Y and 22Y bonds. Spain will also be in the market tapping the Oct-21, Jul-26 and Jul-33 nominals and the Nov-30 linker.
Yesterday was the last February 2019 refinancing auction day for Nordea Kredit and DLR Kredit. RD, Nykredit and Jyske Realkredit will be back in the market today selling DKK17.5bn in DKK-denominated non-callable bullet bonds. Of the DKK17.5bn in DKKdenominated bonds, DKK9.7bn, DKK4.5bn and DKK3.3bn, respectively, will be sold in 1Y, 3Y and 5Y bonds. See February 2019 Refinancing Auctions, Results, Day 3, 6 February 2019.
FX markets
USD strength remains but is driven more by weakness elsewhere (AUD, EUR, GBP, SEK to name a few) despite last week’s clear ‘on hold’ message from the Fed. We stress that the FX market has been eyeing a Fed shift for a while, which has left USD bid nevertheless.
GBP has been weighed upon by week data recently, but Brexit is set to return as its key driver and thus today’s MPC meeting in the BoE is not likely to spur longer-lasting price action for sterling. Market is pricing in the next BoE rate hike to arrive in January 2021, and given the already relatively dovish pricing of the BoE, we do not expect GBP to suffer from potential down revisions to the bank’s GDP and CPI estimates. We expect EUR/GBP to stay within the 0.86-0.89 range near term with the development in Brexit negotiations directional for the cross. Note that Theresa May is expected to visit Brussels today. As such, appetite for GBP is likely to deteriorate as time passes without any signs of a new agreement between the EU and UK.
EUR/SEK continues its relentless move higher initiated on the back of weak macro indicators last week. The cross is back at pre-December-hike levels and even if decent risk sentiment and relative rates suggest the cross is overbought, it is difficult to see what could fade the momentum for now. A lot of macro negativity has likely already been priced into the SEK, which paves the way for positive surprises ahead – not least if we are right that the global economy will bottom out in H1 led by a trade deal. The Riksbank meeting is scheduled for next week (13 February) but new policy signals incl. on reinvestments are unlikely at this stage, in our view. For EUR/SEK, positioning is likely to make it difficult to see a marked move lower and technical indicators also suggest that the upward momentum is intact for now.
