Danske Daily

Stocks move lower for a third day – risk sentiment remains weak in Asian trading.

Mixed economic data in Asia – slightly higher Chinese PMI, weak Japanese Tankan.

EUR/USD falls below 1.30 and risks likely to remain to the downside.

Focus today is on European PMI releases and US activity data.

In Switzerland, all eyes are on whether the SNB will lift the 1.20 floor on EUR/CHF

Markets Overnight

Stock markets fell for a third day and sentiment remains negative in Asia this morning. There were few major news items to drive the market, but in a an environment of weakening global growth and sustained euro tail-risks it is difficult for risk assets to perform – especially since it remains unknown how many eurozone countries will be downgraded following the weak results at last week’s EU summit.

Fitch’s announcement last night that it has downgraded five big European banks did little to support risk sentiment and the S&P500 index closed with a 1.1% loss. Another weak sign is that European bank deleveraging - an important market theme for 2012 - is becoming more evident. Crédit Agricole said yesterday that it will exit 21 of the 53 countries it operates in.

Mixed economic data out of Asia this morning. China’s HSBC manufacturing PMI improved slightly from 47.7 to 49.0, but still suggests that growth is slowing. In Japan the Tankan business survey on balance was weaker than expected, indicating that the recovery in the wake of the earthquake is losing steam.

One result of the global slowdown is easier monetary policy in most countries. Yesterday, Norges Bank became the latest central bank to reverse policy as it lowered rates by 50bp – a more aggressive move than expected and priced. This follows a period from September 2009 to May 2011 in which Norges Bank had gradually lifted the policy rate from 1.25% to 2.25%. NOK weakened while SEK remained surprisingly resilient considering that expectations likely rose for the Riksbank to cut rates next week.

EUR/USD reached our 1.30 3-month forecast yesterday, which bodes the question; now what? While positioning has become stretched and the strong negative momentum should be difficult to maintain, we continue to see risks skewed to the downside. The euro will likely remain under pressure until the market has fully discounted the new de-facto zero rate ECB regime and until there is more clarification about the political process in Europe. That also translates into further downside risks to EUR/JPY and EUR/GBP.

Global Daily

Focus today: On the data front we have a dense global calendar today. We expect the French, German and euro area flash PMIs to decrease slightly as indicated by the continued deterioration in the new orders component. Also the euro area inflation details are worth keeping an eye on. We expect an unchanged reading on core inflation of 1.6%. In UK the November retail sales is the main release, while in the US the release of initial jobless claims is always interesting, but it will be empire manufacturing and industrial production that will reveal insights on the pace of the industrial cycle.

Fixed income markets: Keep an eye on the Spanish auctions this morning. The PMI data will indicate that further monetary easing could be warranted. The refi is expected to be lowered another 25bp to 0.75% implying a narrower interest rate corridor. Money markets have already priced in a lower EONIA fixing, but Euribor fixings remain sticky, although declining slightly. There is widespread concern about the eurozone causing a higher premium on EUR rates, but also causing higher USD Libor fixings. A number of banks yesterday utilized the USD funding facility (USD5.1bn). We continue to suggest a very cautious stance.

FX markets: We released our FX Top Trades for the coming year yesterday. See FX Top Trades 2012 for not only 10 trade ideas, but also six themes that we expect to drive the currency market next year.

EUR/CHF has moved higher overnight to trade near 1.24 ahead of this morning’s SNB monetary policy meeting. The weak November CPI report – showing core inflation dip below -1% y/y – has increased market speculation about further SNB action. The European recession and still strong franc have certainly made a hike of the 1.20 floor more likely and we attach a slightly higher than 50% probability of the SNB already acting today. The argument against a higher minimum target is that a less overvalued Swiss franc might trigger speculative flows testing the SNB. However, as the SNB has showed ever since the onset of the Great Recession in 2008, it will act if it sees high deflation risks. Should the SNB not hike the floor today, we would expect EUR/CHF to move lower as short CHF positions are very stretched – a dip to 1.22 is not unrealistic in that scenario showing the risks of positioning for a higher minimum target.

Scandi Daily

In Sweden we will receive the labour market survey at 09.30 CET, which includes, i.a., the unemployment rate. Our call (6.6%) is based on seasonal patterns holding up and a not yet visible deterioration in employment. Should the outcome be in line with market consensus (6.9%), we would look for either a lower labour force, which is more a harbinger of things to come and in line with our forecast, or higher unemployment, which purports a more acute labour market situation, and could get the Riksbank to act sooner - and more - rather than later.