The main focus continues to be overall market confidence and whether the worst is over with regard to the big equity sell-off earlier this week . Our market sentiment indicators have moved from very stretched positive sentiment two weeks ago to now neutral suggesting that markets are more in balance and sooner or later we expect the upward trend in equities to resume. However, the markets will likely stay fragile short term.
It is super Thursday in UK today with one of the 'big' Bank of England meetings, which includes the Inflation Report and a press conference. We expect an unanimous vote for unchanged rates and a 'wait-and-see' stance from BoE for now. Markets are pricing the probability of a rate hike already in May by 50/50, which is too hawkish in our view.
We will also get a series of ECB speeches and the ECB Monthly Bulletin is released. On the data front we have German trade balance and US initial jobless claims.
In Scandi the SCB house prices for Sweden are released. We put more weight on the Valueguard prices, though.
Selected market news
Markets are still fragile and after a very volatile day, S&P500 closed 0.5% lower yesterday and the future is trading a bit lower this morning. Asian stocks are mixed. VIX declined to 22 yesterday but is back to nearly 28. US 10yr Treasury yield rose yesterday to as high as 2.85, as the increasing US deficit means Treasury needs to issue more debt. Brent oil is down at 65.3 dollars per barrel (versus peak of 70), as data showed US crude production jumped to a record 10.12 million barrels a day last week. This morning, USD/CNY has risen from 6.28 to 6.32 in the biggest increases since the FX regime shift in 2015 , as the Chinese trade balance in January declined to USD20.3bn from USD54.59bn in December due to a big increase in imports (although it is likely just a seasonal blip due to the Chinese New Year, as we usually see dips in the trade balance every year).
US Senate leaders announced a bipartisan two-year spending bill yesterday , which increases spending caps both for defence and non-defence spending adding approximately USD150bn to the government deficit in both 2018 and 2019 (the same as the annual cost of tax reform), so deficit may exceed USD1,000bn next year although the output gap is more or less closed. The deal includes a suspension of the debt limit until March 2019, meaning Treasury can start rebuilding its cash buffer again, which will drain USD liquidity if passed. While House Speaker Paul Ryan and President Trump support the bill, it is opposed by the Republican fiscal hawks in the House and the House Democratic leader Nancy Pelosi, who will not support a spending bill due to the ongoing discussion about immigration reform. The short-term funding bill expires today and risk is a government shutdown tomorrow if the bill is voted down.
Yesterday the deadline expired for nominating candidates to succeed Vítor Constâncio as Vice-president of the ECB . The position as VP is the first of a total of four seat in the ECB's board that is up for change until the end of next year (see diagram towards the end of this piece). The race is between the long-time named favourite Spanish Luis de Guindos and Ireland's Philip Lane.
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