Danske Daily : November 23, 2011

Key news

Stock markets lower in Asia as Chinese PMI declines to a 32-month low US bond yields lower on strong 5-year auction and slightly dovish Fed minutes Fed considered publishing interest rate forecasts according to FOMC minutes Spain auctioned 3-month bill at new high and ECB lending to banks shot up Focus today on Euro PMI and EU report on closer fiscal integration and euro-bonds.

Markets Overnight

Stock markets were lower yesterday on continued concern over the euro crisis and a downward revision in US Q3 GDP to 2.0% from 2.5%. In Asia markets have continued lower as Chinese HSBC manufacturing PMI hit a 32-month low, falling to 48.0 in November from 51.0 in October. This put some cold water on the Chinese recovery expectations. The Hang Seng index is down nearly 2% and the S&P future has shed a little over 1% from the US close.

Fed minutes showed a continued easing bias with discussions centred on improving the communication strategy. While a few members were in favour of easing, the majority wanted to wait to have more time to work with the communication strategy in terms of being more specific on how long Fed plans to keep rates exceptionally low. As new input it was discussed whether to publish members’ interest rate forecast like for example the Swedish Riksbank does.

US 10-year bond yields fell 5bp yesterday on the back of a strong 5-year auction, slightly dovish Fed minutes and declining risk appetite. In FX markets EUR/USD declined below 1.35 overnight on weaker risk appetite. EUR/SEK has increased to 9.24 continuing the rising trend seen over the past month.

The euro crisis attracted further attention yesterday as Spain auctioned a 3-month bill at 5.11% yield, more than double the yield at its last 3-month auction a month ago and higher than the 4.63% Greece paid last week. Upward pressure persists on Spanish and Italian bond yields and the situation is far from under control.

ECB lending to eurozone banks hit a new high for the year as ECB lent almost EUR250bn in its weekly tender as more banks find it harder to access wholesale funding.

According to media sources EU will today propose measures to give it more authority over the national budgets of eurozone states, which includes a requirement to submit tax and spending plans to EU authorities before presenting them to their national parliaments. The proposal will come alongside a report on creating euro-bonds that was already leaked yesterday.

Global Daily

: On the data front we have a dense calendar today. We expect PMI data from Germany, France and the euro area to continue to send strong recession signals. In October the euro area PMIs decreased to around 47 and the forward-looking new orders component dropped even further. We expect the PMI numbers to go even lower in November. Euro area industrial new orders are expected to show a sharp drop as well. In the UK BoE minutes will be released. In the US core PCE is expected to have grown very moderately, while US durable goods orders could give an indication of the pace in investments. Note also that the release of initial jobless claims data has been moved forward to today due to Thanksgiving.

Fixed income markets: Gilts advanced again yesterday on speculation that today’s Bank of England minutes will show that policy makers are leaning toward further monetary stimulus as the economy slows. We think the minutes will show additional softening in the language and will indicate that more QE is coming up soon. UK government debt also advanced after the DMO said it sold GBP3.5bn pounds of index-linked securities. Gilts can in our view continue to perform due to safe-haven flows. Italy was under fire yesterday, which might continue unless ECB starts buying more aggressively which does not seem likely at the moment. Today Germany will issue EUR6bn of new Bunds.

FX markets: EUR/USD continues to trade sideways as stretched positioning and technical support around 1.34 have stalled the euro sell-off. European sovereign spreads continue to widen, however, leaving the downside vulnerable. Should today's European PMI releases disappoint, it could be the trigger of a new break lower in EUR/USD. Use any potential upticks in EUR/USD to consider adding fresh short positions - either in EUR/USD or EUR/JPY. The Swiss franc has strengthened recently and if this continues it could open up for attractive trade opportunities. Consider using a potential drop in EUR/CHF down to 1.2250 to position for renewed upside, as the pair remains supported above 1.22 by verbal SNB intervention and continued speculation about a potential hike of the 1.20 floor.

Scandi Daily

: Norwegian unemployment is not expected to attract much attention given that all eyes are is on the European debt crisis.