Danske Daily

Euro area finance ministers agree to channel EUR150bn to the IMF

US equities trade lower, led by declines in financial stocks

RBA minutes released this morning provide support to AUD

The Riksbank rate decision is the key event in Scandinavian markets today

Markets Overnight

Euro area finance ministers agreed to provide a loan to IMF, announcing last night that EUR150bn would be channelled to the IMF. The additional resources will improve the IMF’s capacity to act as a backstop in case of a further deterioration of the debt crisis, although the amount fell short of the EUR200bn originally expected following the 9 December EU summit. Four countries not using the single currency, including Denmark, indicated their willingness to add to IMF resources. The UK will “define its contribution” in early 2012, according to the EU statement. However, the EU finance ministers were unable to reach an agreement on boosting the EUR500bn rescue fund and to make the ESM more flexible by changing voting rules. Speaking before the EU parliament, ECB President Draghi said yesterday that the ECB must boost financial stability without weakening its credibility, thus again rejecting large-scale government bond purchases.

US stocks traded on a weak note yesterday, the S&P500 index ending the day 1.2% lower. Financials were the day’s steepest decliners, falling more than 2.3%. It was particularly concerns over tighter capital requirements that sent banking sector stocks lower, though continued European sovereign debt woes also added to the negative sentiment. This morning, however, Asian stocks have risen modestly, led by the South Korean KOSPI index. The index has rebounded, as concerns over increasing tensions in the region, following the death of Kim Jong Il, have receded. Media have announced that the deceased North Korean leader’s youngest son, Kim Jong-eun, will assume power in the country.

Longer-dated US Treasury yields traded modestly lower yesterday, causing the 2-10 curve to reach its flattest level since October.

The FX market has seen EUR/USD stabilising at levels around 1.30, after sliding lower last night. AUD received some tailwind after the minutes from the last Reserve Bank of Australia monetary meeting were released. According to the RBA, an “investment boom” and “solid growth” among Australia’s trading partners are shielding the economy from the turmoil stemming from the EU debt crisis, in turn leading traders to reduce bets for rate cuts.

Global Daily

Focus today: We expect that the Swedish Riksbank today will follow Norges Bank and initiate an easing cycle by lowering the repo rate by at least 25bp. The German Ifo index will be watched carefully for signs that the German economy is beginning to pick up again. The Ifo expectations index is at a turning point according to our model and could show a small gain already this month, while the current conditions index is expected to decline further. In the afternoon US housing data (housing starts, building permits) might signal some improvement from very low levels.

Fixed income markets: The markets continued in risk-off mode yesterday with both equities and bond yields trading lower. It is now apparent that the EU will not meet its EUR200bn funding target for the IMF due to lack of external contributors. Moreover, uncertainty about the extensions of the US payroll tax cut and unemployment benefits hit risk appetite. On top of this the markets are still awaiting an announcement from S&P on the rating decision on the EU 17 countries and the EFSF. All this is likely to create continued uncertainty and we retain a bias for lower rates. Interestingly, there is a slight tendency for German bonds to underperform the US and Denmark, which is worth keeping an eye on in the next few days. In another sign of stress, both 3M and 6M Euribor fixings surprisingly rose yesterday along with a continued ascent in the USD libor fixings. The next big event is the 3YR LTRO allotment published tomorrow.

FX markets: While EUR/USD seems to have stabilised for now, the single currency is likely to see sustained downside pressure until clarity on the political process ahead emerges. Hence, we see potential for a near-term move to sub-1.30 levels. That said, positioning is stretched, as risky assets are pricing in a very negative growth outlook for 2012 and positive news on the debt crisis or a stabilisation in macro data could potentially send the pair sharply higher. From that perspective, we recommend keeping an eye on today’s Ifo data, to see if the positive tendency seen in the EU PMIs continues.

Scandi Daily

Sweden: The Riksbank repo rate decision will be announced at 09:30 CET. In our view, as argued in the latest Reading the Markets Sweden and FX Crossroads, everything is in place to embark on an easing cycle. Forward looking macro data have been softer, inflation runs below forecast, the debt crisis in Euroland has intensified (now more in line with the Riksbank’s alternative scenario where the rate should be cut 50bp than the main scenario) and both the ECB and Norges Bank have cut the policy rate by 50bp. We expect the Riksbank to start with 25bp today with risk tilted to 50bp. As a main scenario we doubt that it will provide a long-term repo facility like in 2008, but the transmission mechanism will probably be addressed. 25bp would be the most neutral outcome for markets given that approximately 30bp is priced in. 50bp should send short rates lower and EUR/SEK higher, whereas if it leaves the repo rate unchanged, rates will spike and EUR/SEK is expected to plunge.