Key news
* New technocrat government in Italy is welcomed by the market
* Risk sentiment has improved and stocks have risen in Asia overnight
* Focus today is on the Italian bond auction – and on whether the ECB will step up its purchases of Italian debt in the secondary market
* EUR/USD has traded stable above 1.3750 - bond yields are slightly higher.
Markets Overnight
Italian Prime Minister Berlusconi resigned on Saturday after an austerity package was passed in the Lower House. President Napolitano has asked Senator Monti (former EU commissioner) to form and lead a so-called technocrat unity government. The new government could be presented as soon as today and is set to be endorsed by the parliament later this week. The market reaction has been positive as the government is seen to be more credible in addressing fiscal imbalances The yield on 10Y Italian bonds fell further on Friday to close below 6.5% - seeing the spread to Germany narrow to 458bp after having traded >550bp earlier in the week.
The move was also welcomed by EU’s Van Rompuy and Barroso who wrote in a joint statement that “we believe that it sends a further encouraging signal...of the Italian authorities' determination to overcome the current crisis.”
Risk sentiment has improved and stock markets have shown decent gains in Asian trading – also helped by strong Japanese GDP data. The Japanese economy expanded for the first time in four quarters, growing an annualized 6% in the third quarter (consensus expectation was 5.9%) as the economy recovers from the earthquake earlier this year.
The improvement in market risk sentiment is vulnerable, however, as it largely relies on the expectation of accelerated ECB intervention in the government bond market. Italy is scheduled to sell up to EUR3bn of 5-year bonds today in an auction that is likely to go fairly well (see Government Bonds Weekly), but relying on ECB intervention is not a long-term strategy. In other words, the introduction of technocrat governments in Greece and Italy is positive from a market perspective and could trigger a period of relief, but the markets are still vulnerable and risks remain significant.
In the FX market, the euro rebounded on Friday and has traded stable against the dollar in a 1.3750-1.3800 range overnight. In general the cyclical currencies have strengthened as can be seen from the rebound in e.g. ZAR and MXN.
Global Daily
Focus today: Today there will be focus on whether ECB will reward Italy for approving the reform and austerity package on Saturday by stepping up its purchases of Italian government bonds. Although the new government is not yet in place, ECB in our view will most likely step up its bond purchases, see Flash Comment: Italy - Two Super Marios could take Italy to the next level released this morning. ECB will today publish its government bond purchases under the SMP-programme for the week ending 11 November. It is likely to show another increase in weekly purchases to above EUR10bn from EUR9.5bn in the previous week. However, the big surge in purchases will probably not be evident until next week’s data are released. The market will continue to follow the political developments in Italy and Greece closely. In Italy we are waiting for news on a new government headed by Marion Monti and in Greece new Prime Minister Papademos will present his political programme before the parliament today ahead of a scheduled confidence vote on Wednesday. In the data calendar the only major release today is euro area industrial production, which we expect to have dropped sharply in September.
Fixed income markets: The big question today is whether the ECB will acknowledge the progress in Italy during the weekend and step up bond purchases in the Italian bond market - or even issue a statement regarding this. If it does, it will be very positive. In any case, the weekend's news flow is positive and even the expectation of a step-up in bond purchases will support risk this morning. However, the markets will be tested already later today, when Italy is auctioning 5yr bonds. In combination with signs of ECB softening its rate stance, curve steepeners in EUR swaps are now looking interesting. We also think there is upside to 3m Euribor futures (in price) as markets should start to price some probability that ECB cuts below 1%.
FX markets: The formation of technocrat governments in Greece and Italy could lead to further short-term relief in the market – especially when also backed by increased bond purchases by the ECB. This could see the cyclical commodity currencies rebound further. EUR/USD has already rebounded back above 1.37 and while a further unwinding of short positions does have potential to lift the pair further, we still see risks as skewed to the downside over the coming months. EUR/CHF has fallen sharply this morning after rising above 1.24 late last week – once again most likely on speculation that the SNB could hike the 1.20 floor.
Scandi Daily
No key data releases out of Scandinavia today.
* New technocrat government in Italy is welcomed by the market
* Risk sentiment has improved and stocks have risen in Asia overnight
* Focus today is on the Italian bond auction – and on whether the ECB will step up its purchases of Italian debt in the secondary market
* EUR/USD has traded stable above 1.3750 - bond yields are slightly higher.
Markets Overnight
Italian Prime Minister Berlusconi resigned on Saturday after an austerity package was passed in the Lower House. President Napolitano has asked Senator Monti (former EU commissioner) to form and lead a so-called technocrat unity government. The new government could be presented as soon as today and is set to be endorsed by the parliament later this week. The market reaction has been positive as the government is seen to be more credible in addressing fiscal imbalances The yield on 10Y Italian bonds fell further on Friday to close below 6.5% - seeing the spread to Germany narrow to 458bp after having traded >550bp earlier in the week.
The move was also welcomed by EU’s Van Rompuy and Barroso who wrote in a joint statement that “we believe that it sends a further encouraging signal...of the Italian authorities' determination to overcome the current crisis.”
Risk sentiment has improved and stock markets have shown decent gains in Asian trading – also helped by strong Japanese GDP data. The Japanese economy expanded for the first time in four quarters, growing an annualized 6% in the third quarter (consensus expectation was 5.9%) as the economy recovers from the earthquake earlier this year.
The improvement in market risk sentiment is vulnerable, however, as it largely relies on the expectation of accelerated ECB intervention in the government bond market. Italy is scheduled to sell up to EUR3bn of 5-year bonds today in an auction that is likely to go fairly well (see Government Bonds Weekly), but relying on ECB intervention is not a long-term strategy. In other words, the introduction of technocrat governments in Greece and Italy is positive from a market perspective and could trigger a period of relief, but the markets are still vulnerable and risks remain significant.
In the FX market, the euro rebounded on Friday and has traded stable against the dollar in a 1.3750-1.3800 range overnight. In general the cyclical currencies have strengthened as can be seen from the rebound in e.g. ZAR and MXN.
Global Daily
Focus today: Today there will be focus on whether ECB will reward Italy for approving the reform and austerity package on Saturday by stepping up its purchases of Italian government bonds. Although the new government is not yet in place, ECB in our view will most likely step up its bond purchases, see Flash Comment: Italy - Two Super Marios could take Italy to the next level released this morning. ECB will today publish its government bond purchases under the SMP-programme for the week ending 11 November. It is likely to show another increase in weekly purchases to above EUR10bn from EUR9.5bn in the previous week. However, the big surge in purchases will probably not be evident until next week’s data are released. The market will continue to follow the political developments in Italy and Greece closely. In Italy we are waiting for news on a new government headed by Marion Monti and in Greece new Prime Minister Papademos will present his political programme before the parliament today ahead of a scheduled confidence vote on Wednesday. In the data calendar the only major release today is euro area industrial production, which we expect to have dropped sharply in September.
Fixed income markets: The big question today is whether the ECB will acknowledge the progress in Italy during the weekend and step up bond purchases in the Italian bond market - or even issue a statement regarding this. If it does, it will be very positive. In any case, the weekend's news flow is positive and even the expectation of a step-up in bond purchases will support risk this morning. However, the markets will be tested already later today, when Italy is auctioning 5yr bonds. In combination with signs of ECB softening its rate stance, curve steepeners in EUR swaps are now looking interesting. We also think there is upside to 3m Euribor futures (in price) as markets should start to price some probability that ECB cuts below 1%.
FX markets: The formation of technocrat governments in Greece and Italy could lead to further short-term relief in the market – especially when also backed by increased bond purchases by the ECB. This could see the cyclical commodity currencies rebound further. EUR/USD has already rebounded back above 1.37 and while a further unwinding of short positions does have potential to lift the pair further, we still see risks as skewed to the downside over the coming months. EUR/CHF has fallen sharply this morning after rising above 1.24 late last week – once again most likely on speculation that the SNB could hike the 1.20 floor.
Scandi Daily
No key data releases out of Scandinavia today.