Danske Daily

With no signs of more aggressive bond purchases from the ECB and fear of an imminent downgrade of France, it appears markets are still in risk-off mode.

However, there have only been modest market movements overnight. EUR/USD continues to edge lower and Asian stock markets are slightly lower.

Focus today will continue to be on a possible downgrade of France, US retail sales and the Fed meeting this evening.

Markets overnight

With no signs that the ECB has stepped up its bond purchases and increasing speculation that a downgrade of one or more eurozone countries is imminent, it appears that markets are still in risk-off mode, albeit market movements overnight have been modest.

There is increasing speculation that France will lose its triple A status when S&P delivers its judgement on the outcome of last weekend’s EU summit, possibly as soon as this week. Expectations of an imminent downgrade of France were boosted by comments from President Sarkozy and his finance minister Baroin in which they have suddenly started to downplay the impact of a possible downgrade of France, see Financial Times. Moody’s announcement that it will also review its rating of the eurozone countries has also added to expectations that another round of downgrades is in the pipeline.

In addition, last weekend’s deal on fiscal discipline at the EU summit still faces a very bumpy ride. In France, Francois Hollande, the Socialist Party leader candidate for president who is currently the clear leader in opinion polls, said that he would seek to renegotiate the deal if elected.

The US stock market yesterday finished lower with S&P 500 closing down 2.5%. In addition to concerns about the development, a profit warning from Intel for Q4 also weighed on the market. Asian stock markets are slightly lower this morning, largely catching up with the negative development in Europe and the US yesterday. US stock futures have traded largely unchanged in Asian trade.

In the US bond market 10-year yields declined yesterday, but have edged slightly by about 2bp since markets closed in Europe yesterday on the back of a slight recovery in the US stock market in late trade. In the European bond market, both Italian and Spanish bond yields edged higher, closing the day at 6.56% and 5.79%, respectively.

In the FX market EUR/USD has edged slightly lower and is this morning trading slightly below 1.32. GBP also continues to benefit from the eurozone woes. In the Scandinavian currencies, both NOK and SEK have weakened slightly against EUR since market close yesterday.


Global Daily

Focus today: A downgrade of France and EFSF could take place today. Sarkozy’s tone with regard to a possible French downgrade changed notably yesterday when he said that a downgrade “would be an additional difficulty, but is not insurmountable”. This might indicate that he knows that a French downgrade is imminent. Today’s FOMC meeting is not expected to surprise policy wise (no new measures and unchanged monetary stance), but changes in the communication strategy could be announced. US retail sales are expected to have remained on track with a 0.5% m/m increase in November driven in particular by car sales. Core sales are expected to look somewhat weaker. UK CPI probably eased to 4.7% y/y in October. German ZEW expectations are projected to remain subdued. Bundesbank Governor Jens Weidmann is due to speak in Frankfurt this evening.

Fixed income markets: As we expect no major surprises in the Fed’s stance on monetary policy, we think the market reactions in US fixed income and rates markets should be muted. The key driver of US bond yields and swap rates is still the euro debt crisis. Hence, the surprisingly strong US data seen lately has not led to bearish curve steepening as would have been the expected curve move. It is also notable that USD Libor rates continue to rise and imply indirect monetary tightening of US monetary policy – also an effect of the euro debt crisis. In terms of euro rates markets, we think risks are still clearly tilted for more risk-off today – especially if S&P downgrades France. In that case, we would expect further spread widening of peripherals against German benchmark bonds and more bullish flattening of the German curve.

FX markets: The euro came under severe pressure yesterday as rating agencies said they were not impressed by the outcome of the EU summit last week. Concerns about the euro were further fuelled by Sarkozy’s comments about a possible downgrade. As we write above, there is a risk that a downgrade of France and EFSF could take place as early as today. If that happens, we should expect more downward pressure on EUR/USD. It now seems likely that our 3M forecast for EUR/USD at 1.30 could be reached already this week. The FOMC meeting is not expected to move the FX market much. US retail sales could support risk appetite as it is further expected to underline that the US economy is on track despite the European debt crisis. We continue to keep an eye on EUR/CHF ahead of Thursday’s important SNB meeting. The bleak eurozone news pushed the cross lower yesterday, but with Swiss inflation in deflationary territory, the likelihood of a higher SNB minimum target already this week has certainly risen.

Scandi Daily

Sweden: CPI inflation for November will be released today and our forecasts are identical to the current market consensus, i.e. 0.1% m/m/2.7% y/y and 0.1% m/m/1.0% y/y for CPI and underlying CPIF, respectively. That said, we see mainly downside risk to our forecasts due to possible early clothing sales and the general weaker economic environment. Inflation in October was weaker than expected, suggesting that inflationary pressures are fading fast. Hence, should the downside risk in November materialise, it could force action from the Riksbank later this month.