Danske Daily

Asian stocks are trading higher this morning on speculation about an IMF deal for Italy and the possibility of ECB buying up more aggressively in the European fixed income markets. The news flow over the weekend indicates that the governments of Germany and France are working on a deal on further fiscal integration in the eurozone based on bilateral voluntary national agreements. This could open the door for a more active role for the ECB in the resolution of the European crisis. Comments from German “wise man” Peter Bofinger and Bundesbank chief Wiedeman indicate a slight softening of the German stance on monetary easing.

Markets Overnight

The Asian stock markets got off on a positive note this morning as investors were betting that Italy could get an IMF deal. This comes after the Italian newspaper La Stampa on Sunday reported that the IMF is preparing a EUR600bn loan for Italy. However, this morning the IMF said that it is not discussing a financing programme.

The pressure on the ECB to act decisively is mounting and over the weekend German “wise man” Peter Bofinger said that if the ECB does not act soon Europe would risk a “disaster”. Bofinger also said that the risk of deflation was much higher than the risk of high inflation and especially German fears of high inflation were “irrational”. Comments from Bundesbank governor Weideman over the weekend also indicate a slightly softer stance from the Bundesbank on monetary easing. Weideman will speak in Washington today.

Based on the rather intense news flow over the weekend it has become increasingly clear that Germany and France aim to speed up the European fiscal integration - apparently without involving treaty changes, but rather rely on bilateral voluntary national agreements. Further fiscal integration in the eurozone would result in stricter rules for fiscal discipline and commitment to such rules could open the door for the ECB to step up its efforts to curb the crisis. Hence, market participants are likely to view any move towards fiscal integration as a move towards the ECB becoming more involved in crisis resolution. Again, these are media reports and nothing has been confirmed, but it is probably helping the positive sentiment in the global markets this morning.

The stream of comments and news over the weekend all add up to an increased likelihood that the ECB will step up its efforts to help curb the European debt crisis and this is likely to help the sentiment in the European fixed income markets today where focus will turn to ECB’s announcement of bond purchases – the so-called SMP (Securities Markets Programme).
Global Daily

Focus today: The euro debt crisis continues to drive the markets. Focus will be on comments from EU officials and leading politicians in the euro countries in order to see how close they are to finding a response to the current turmoil. In terms of data we have US new home sales but this is not going to have a big impact on the market as focus is elsewhere now.

Fixed income markets: Germany and France seem to be working on a deal to speed up European fiscal integration. This would not involve treaty changes, but rather rely on bilateral voluntary national agreements. If the idea gains traction the ECB could become more involved in the crisis resolution and maybe even introduce a rate cap on EMU sovereigns. If this happens we should see huge relief in financial markets, but we are not there yet and this week’s gross issuance of about EUR20bn out of Belgium, France, Italy and Spain could prove a big challenge in a distressed market. Furthermore, there are T-bills from Portugal and Greece. We expect that the ECB will be in the market on Monday morning and that the auctions will NOT fail despite the negative sentiment in the market. ECB and EU politicians will NOT allow increased tension in the market, where France, for example, cannot sell bonds.

In the FX markets the euro has been supported slightly overnight by the story that the IMF is preparing a bailout of Italy. However, the support is only expected to be temporary and we still recommend selling the cross on up-ticks. Italy’s need for help from the IMF underlines the seriousness of the situation and the problems the euro is facing currently. Today the debt crisis will continue to set the agenda. We keep a close eye on the speech by German ECB member Weidemann at 18.00 CET to see if he has changed his fierce opposition against a more activist ECB. In that respect see also the SMP buying at 15.30 CET.