Danske Daily - 24 February 2012

Stock markets  up  on stronger data.  Oil price pushes higher again to USD124 per barrel.

ECB president Mario Draghi sees no scope for easing deficit targets.

US 10-year yield down after strong 7-year auction. EUR/USD rises on strong Ifo and lift in risk appetite.

Focus today on expected Greek downgrade, US new home sales and several speeches from both ECB and Fed members. G20 meeting coming up this weekend.

Markets Overnight

Equity markets continue  their gradual rise with S&P500 adding 0.4% yesterday and Asian  markets increasing further. S&P500 closed at 1363.46, very close to last year’s high reached in April at 1363.61. Stronger readings for the German Ifo index, US jobless claims and US house prices supported the market, confirming the picture of a strengthening recovery.

The oil price has risen to USD124 per barrel on stronger data and supply concerns due to the tensions with Iran.

ECB president Mario Draghi took a tough stance on budget deficits in an interview with Wall Street Journal  saying that “backtracking on fiscal targets would elicit an immediate reaction by the market" . The comments come as a debate in Europe is intensifying whether austerity has gone too far and should be eased due to the very negative effects on economic growth. Spain is currently pressing the EU to ease its deficit target for this year from 4.4% to above 5%.

Greece yesterday approved a debt restructuring plan involving collective action clauses . This will likely trigger  a downgrade to selective default, probably already today. EUR206bn of Greece’s total debt of EUR350bn is eligible for restructuring and the law implies that Greece can make changes to all of the EUR206bn worth of bonds if two-thirds of bond holders approve the changes.

US  10-year  bond yields were lower overnight despite the positive risk sentiment as a very strong 7-year auction pushed yields down.

In the FX markets EUR/USD gained further to 1.337 supported by the stronger risk appetite and further rise in the oil price. USD/JPY is broadly unchanged while EUR/GBP has continued to increase. EUR/SEK was modestly higher overnight .

Global Daily

Focus today: On the data front we have a very light calendar today and focus is likely to be on the situation in Greece and tensions in the EU regarding possible easing of austerity and Germany’s resistance to increase the firewall. Both Germany and the UK will today release the first revisions of Q4 GDP data. The most interesting in connection with these GDP data is that for the first time we will get detailed expenditure data. In the US new home sales for January is the only major release scheduled for today. In addition there will be speeches by FOMC-members Williams, Bullard, Plosser and Dudley.

This weekend G20 finance ministers and central bank governors will meet in Mexico City. On top of the agenda  are additional financial resources for the IMF and possibly also the implementation of Basel III. The discussion about increasing IMF resources has now become intertwined with increasing ESM resources, as countries like China, Japan and the UK have made any additional contribution to the IMF conditional on the  euro area countries increasing the ESM firewall. With Germany fiercely against this it looks increasingly likely that there will not be an announcement about additional resources for the IMF in connection with the G20 meeting this weekend.

Fixed income markets: Slightly more mixed economic data out of Europe and Asia have dampened optimism about the economic recovery a bit in recent days. On top of this, Germany’s resistance to boost the size of the European backstop facilities is taking away some of the lustre from the Greek debt deal. With a light calendar today focus is likely to remain on these issues and we expect little action in the markets. We continue to keep a close eye on the oil price, which could be a dominating theme in the coming weeks if it continues to move higher. There is supply from Italy printing 2Y zero-coupon bonds and inflation-linked BTPs.

FX markets: Option market volatility (3M for the G7 currencies) has fallen to the lowest level since before Lehman Brothers. Coupled with a stabilisation in global macro data and plenty of liquidity provided by the major central banks it is a very good environment for carry strategies. This not only benefits the commodity currencies (we think AUD could post new year highs), but also supports EUR where speculative investors are still caught too short.