Market movers today
Focus to remain on risk sentiment after sharp moves in equities and currencies overnight. Today's main calendar events are US ISM manufacturing and the Norwegian unemployment rate.
In the US, ISM manufacturing is expected to fall back slightly to 57.5, still indicating strong growth in the US economy. Trade tensions have yet to show a significant impact on the US economy, however early signs may have emerged already after the lower Apple (NASDAQ:AAPL) sales estimates were attributed mainly to lower Chinese purchases.
In Norway, we expect the jobless rate to land at 4.0%; more on page 2.
We also get Danish FX reserves today, which may very well indicate an end to the 20-month streak with no intervention; more on page 2.
Tomorrow morning we will publish our updated view on the Nordic economies in our Nordic Outlook publication.
Selected market news
Risk was in another 'off' move overnight as equities went on the defensive and currencies experienced a 'flash crash' in JPY crosses. Throughout Wednesday, sentiment was weighed down by the dire Chinese PMI in the morning and mediocre European PMIs, but took a further significant hit as Apple issued a revenue warning last night, leading its stock to plummet in after-market trading. US equity futures weighed, with S&P futures down more than 1%; Asian indices were also markedly lower as notably Apple suppliers were sold off.
The bleak mood in stock markets - coupled with thin liquidity as the Japanese remain out for holidays - further helped to set off a 3.5% drop in notably AUD/JPY and a plunge in USD/JPY to below 105 (from around 109). The moves may have been exacerbated by FX algo trading amid meagre liquidity, and were later partly reversed with USD/JPY now trading around 107. US yields are still on the defensive and the 'risk-off' move led the 10Y towards 2.62%, close to 1Y lows. The price of crude oil bounced a tad yesterday after Saudi Arabia was said to rein in exports but it was dragged down with risk assets again overnight.
The moves overnight are clearly a testament to the fact that risk markets remain vulnerable due to a faltering global macro backdrop, and notably the global economic surprise index continues the deroute which started early in the autumn. Indeed, it is easy to eye the challenges for markets going into 2019: the trade dispute remains unresolved and China continues to lose momentum, Trump remains adamant on wall-building and the US government remains shut down, and in Europe populism is again on the rise ahead of the EU parliamentary elections and Brexit remains unsettled. Near term, the US ISM today and the jobs report tomorrow will be crucial in setting the scene for risk appetite among investors.
Scandi markets
In Norway, we expect the LFS unemployment to be held in check by a growing supply of labour and emerging bottleneck problems on the one hand, and further healthy employment growth on the other. We therefore predict an unchanged jobless rate of 4.0%.
Fixed income markets
The slowdown in the global economic growth outlook and volatile equity markets are driving bond yields lower. The rally in the core EU markets is overdone, but given both the economic and political uncertainty dominating the markets at the moment, the risk is that yields will continue to decline. Today, Spain will be tapping between EUR4bn and EUR5bn in the 3Y, 5Y and 10Y benchmark bonds as well as tapping between EUR0.25bn and EUR0.75bn in the 15Y linker. France was supposed to tap on Thursday. However, the French Debt Office has not announced an auction today, and thus we have to wait until the third Thursday in January. Yesterday, we presented some trade ideas on the back of our supply and reinvestment outlook for 2019.
Today, the FX reserves from the Danish Central Bank are published. These are much awaited as the EUR/DKK was trading well above Central Parity during December. There has been plenty of speculation about intervention as well as the possibility of an independent rate hike by the Danish Central Bank. Finally, we have revised our inflation target for Denmark. The cancellation of the media licence could potentially lead to a substantial drag on Danish inflation this year and for years to come. However, the Danish statistical office has changed the calculation method and thus the cancellation will not affect Danish CPI; subsequently, we have revised our inflation forecast upwards; more here.
FX markets
The ‘flash crash’ in JPY crosses in focus overnight (see page 1) following a day where most European currencies weakened against the USD as the weakness evident in China coupled with Europe’s lingering political issues fuelled notable GBP, EUR and Scandi depreciation; CHF is also on the defensive. JPY strength has been omnipresent since mid- December, cementing the status of the yen as the only safe haven these days amid political risks elsewhere. But, the USD looks set to stay strong for now against European and EM currencies with potential from much too soft Fed pricing in our view.
For the Scandies, global risk sentiment remains instrumental near term. For the SEK, the next key domestic releases will be the 9 January Riksbank minutes from the December first-hike meeting and 14 January inflation data. After the ‘dovish hike’ before Christmas it will be interesting to read how the different Board members weigh a wish to get away from negative-rate territory against the upcoming inflation disappointments that are embedded in our forecast. We see only limited upside in the krona from here but remain short EUR/SEK with a (soft) target of 10.10. The move higher in oil prices held a hand under the NOK yesterday higher and today’s LFS labour market report is unlikely to trigger major moves. We remain short EUR/NOK and long NOK/SEK and generally recommend corporates with NOK expenditures (or NOK-based corporates with EUR exposure) to utilise the year-end move by locking in exposure via FX forwards.
For the EUR/DKK, focus today will be on December FX reserve figures (published at 17:00 CET). The EUR/DKK traded up to around 7.4675 in December – an unusually high level, which historically has prompted FX intervention buying of DKK by Danmark’s Nationalbank (DN). Hence, the market will be alert to whether DN halted 20 months of FX intervention drought in December.
