Danske Daily

Risk sentiment is still slightly positive supported by reports of a possible substantial boost in IMF resources and hopes of an imminent PSI deal.

Stock markets continue to edge higher and EUR has strengthened slightly overnight.

Press reports that China is weighing different options for easing monetary policy.

Focus today  will remain on the PSI negotiations. In addition focus will be on
government bond auctions in France and Spain, Q4 earnings and US economic data this afternoon.

Markets Overnight

The risk sentiment in the market remains slightly positive. Press reports that IMF
will  seek to boost its lending resources by USD500bn in connection with the G20 Finance Minister meeting in late February have been positive for market sentiment, even though it is certainly not a done deal as the US have been resisting it. Furthermore, there is hope that we are now very close to a deal in the PSI-negotiations between Greece and IIF about a debt swap of Greek government debt.

In addition, there  have been press reports that China is weighing different  measures to ease monetary policy. This includes postponing the implementation of higher capital requirement rules for banks. There are also expectations that the Chinese central bank could cut the reserve requirement before the Chinese New Year holiday starts on 23 January.

The US stock market yesterday closed higher with S&P 500 finishing up 1.1. Goldman Sachs’ Q4 earnings beat expectations and financial stocks outperformed the overall market.  Asian stock markets are also mostly up this morning, with Nikkei and Hang Seng up 1.2% and 1.1% respectively.

In the US bond market bond yields have edged higher and the yield curve has steepened on the back of the positive risk sentiment in the market. 10-year US bond yields have increased by about 3bp to 1.89% since market close in Europe yesterday. In the European bond market Italian and Spanish bond yields also continued to edge slightly lower yesterday to 6.42% and 5.15% respectively.

In the  FX market EUR has strengthened slightly overnight and EUR/USD is this
morning trading 1.286. NOK and SEK have strengthened marginally against EUR.

Global Daily

Focus today: The financial markets will continue to focus on the restarted PSI
negotiations in Athens between the Greek government and IIF on a debt swap agreement for  Greek government  debt. The hope is that an agreement can be ready for the Euro Group meeting on 23 January and for that reason a deal will have to be reached in the coming days. Today there will also be focus on auctions of government bonds in France, Spain and Hungary. Q4 earnings could prove to be a market mover today with Microsoft, Intel, IBM, Google, Morgan Stanley and Bank of America all reporting today. In the data calendar focus will mainly be on the US, where CPI, housing starts, initial unemployment
claims and the Philadelphia Fed manufacturing survey are scheduled this afternoon.

Fixed income markets: Positive risk sentiment on the back of solid manufacturing and housing reports yesterday in the US will set the tone for today. However, so far, there is limited reaction in bond yields of the safe-haven markets to the strong data. We believe that continued uncertainty about the EU debt crisis, possibly a safe-haven impact from the downgrade of EU countries and the balance sheet expansion from central banks play a part in this. However, we believe that if the current flow of solid overseas data continues
it will just be a matter of time before the US bond market begins to sells off.

Today focus will be on the bond auctions in Spain and France. Spain is selling ’16, ’19 and ’22 bonds. France is selling ’14 and ’15 notes and ’16, ’22 and ’40 linkers. It will be interesting to see the auction results in the wake of the downgrade, but we believe that demand will be decent and that the auction will go through smoothly.

FX markets: Markets were in risk-on mode yesterday and the S&P500 index is now up 4%t year-to-date, in fact the strongest start to the year since 1987. From that perspective, it is perhaps a little puzzling that the euro has not performed better, given the one-sided positioning for euro downside. However, it underlines the significant event risk associated with the single currency, which could see the correlation with equities fade, as investors find it more attractive to express positive views on risk sentiment e.g. through long positions in the Scandies and the commodity currencies. We continue to look for further downside in EUR/NOK and EUR/SEK, though for the latter, signs of weakness in
Swedish macro data may limit the downside. If risk sentiment holds up today, e.g. by the emergence of further news on a Greek debt swap deal, further unwinding of euro shorts is also likely. Other than that, a string of US data, Q4 earnings reports and not least European bond supply will be in focus today.