Key news
The European debt crisis escalates further and there was strong pressure on core triple-A countries like France, Austria and the Netherlands yesterday. The debt crisis seriously dents the growth outlook for the eurozone and we forecast it will force the ECB to introduce a de facto zero rate policy in January next year. The euro to weaken to 1.30 against the dollar over the next three months.
Markets Overnight
Despite the ECB buying in the secondary market according to media sources yesterday, Italian bond yields for the second time in a week rose above 7% - the „point of no return‟ that previously forced Greece, Portugal and Ireland into rescue packages.
In our view the crisis has now escalated to a new dangerous level, as bond yields from triple-A countries like France, Austria, the Netherlands, Finland and Austria also rose dramatically yesterday. The market is now pricing that e.g. France and Austria will lose their top-rating. French and Austrian 10y yields are now more than twice as high as the German equivalent, trading with a spread of 194bp and 184bp to Germany, respectively. Yesterday European Markets Commissioner Barnier proposed that European regulators should be able to suspend credit ratings on countries seeking bailouts. However, this rather special „let‟s shoot the messenger‟ solution did not get backing from his fellow Commissioners and WSJ reports that he has withdrawn his proposal for now.
Also Spain felt the weak investor appetite for non-German eurozone debt. Spanish 10y yields rose to 6.27% and the spread to Germany widened to 453bp. Spanish bonds are now in the danger zone for a haircut from LCH clearnet. It was new margin requirements from LCH that initially pushed Italian bonds above 7% last week.
The eurozone grew a decent 0.2% q/q in Q3, but the full effect of the current debt crisis will not be visible until data for this quarter are ready. The sharp drop in eurozone industrial production in September reported on Monday and weak PMIs reported last week indicate that expansion was already slowing dramatically going into Q4, see Flash Comment: Decent growth in Q3 – don’t get used to it! As a consequence of the weak growth outlook we changed our interest rate forecast yesterday. We now expect the ECB to cut rates in both December and January, which will for the first time ever bring the refi-rate below 1%. We are now basically calling for zero rates in the eurozone as the important deposit rate is expected to be lowered to just 0.25%, see Research: ECB set to cut rates to record lows. The weak growth outlook and de facto zero rates are also expected to weigh on the euro, and we have lowered our EUR/USD forecast to 1.30 on a 3M horizon.
But it was not all gloom and doom yesterday. US retail sales rose 0.5% in October and the Empire survey pointed to expansion adding to hopes that the US can decouple from an expected European recession. S&P rose 0.5%, but Nikkei down 1% this morning.
Global Daily
Focus today: Markets will continue to watch the political developments in Italy, where Mario Monti today is expected to present his new government. In Greece the Papademos government is expected to be approved by the parliament in a confidence vote. Neither of these events is likely to be able to turn sentiment in a more favourable direction. In the short run only signs of more aggressive bond purchases by the ECB in the secondary market appear to be able to turn sentiment around. In Europe we have a light calendar today with main focus on the Bank of England‟s inflation report and final euro area consumer prices for October. In the US consumer prices and industrial production for October will be released this afternoon.
Knowing that inflation has peaked and having received Governor King‟s letter to the Chancellor yesterday, the sting has been taken out of Bank of England‟s inflation report. We do not expect any bold measures to be announced but still recommend to keep an eye on the presentation of the report, which previously has been a market mover.
Fixed income markets: The European debt crisis is worse than ever. Even the core of the core countries is now widening relative to Germany and most eurozone sovereign markets are trading with very thin liquidity. Yesterday German 2yr Schatz yields touched new record lows. We have published a new yield forecast and now expect that the ECB will cut to 0.75% in January. With data continuing to deteriorate and the debt crisis running rampant, we see room for lower rates in Germany and the EUR swap curve in the coming three to six months. In our view, only a step up in ECB purchases can re-establish confidence in the eurozone sovereign bond markets and send yields higher. The recent signs of improvement in the US economy are encouraging though, and supports our view that the spread between long US and German yields is set to widen further. Watch out for the Portuguese t-bill auctions at 11:30 today.
FX markets: The European debt concerns and the outlook of a eurozone recession in Q4 continue to put pressure on the euro and EUR/USD has fallen below 1.345 overnight. Our new forecast that the ECB will cut the refi rate to a historical low of 0.75% and de facto introduce zero rate policy is expected to weigh further on the euro over the coming months. Hence, we now expect that EUR/USD will fall to 1.30 on a 3-month horizon, see FX Forecast Update that was published yesterday. Before the SNB introduced the 1.20 minimum target in EUR/CHF the franc would have strengthened significantly on a day like yesterday. However, growing speculation that the SNB might lift the target as early as December kept EUR/CHF well supported close to the 1.24-level. Hence, it leaves the market with JPY as the only true safe-haven currency. In that respect the BoJ did little to mitigate the safe-haven flows at today‟s monetary policy meeting. As expected the policy board kept its zero rate policy unchanged and cut its economic assessment due to global slowdown fears. However, it did not introduce new measures to fight the appreciating yen. We forecast that BoJ will have to accept USD/JPY sliding to a record low 74 over the next six months.
Scandi Daily
No key data releases in Scandinavia today.
The European debt crisis escalates further and there was strong pressure on core triple-A countries like France, Austria and the Netherlands yesterday. The debt crisis seriously dents the growth outlook for the eurozone and we forecast it will force the ECB to introduce a de facto zero rate policy in January next year. The euro to weaken to 1.30 against the dollar over the next three months.
Markets Overnight
Despite the ECB buying in the secondary market according to media sources yesterday, Italian bond yields for the second time in a week rose above 7% - the „point of no return‟ that previously forced Greece, Portugal and Ireland into rescue packages.
In our view the crisis has now escalated to a new dangerous level, as bond yields from triple-A countries like France, Austria, the Netherlands, Finland and Austria also rose dramatically yesterday. The market is now pricing that e.g. France and Austria will lose their top-rating. French and Austrian 10y yields are now more than twice as high as the German equivalent, trading with a spread of 194bp and 184bp to Germany, respectively. Yesterday European Markets Commissioner Barnier proposed that European regulators should be able to suspend credit ratings on countries seeking bailouts. However, this rather special „let‟s shoot the messenger‟ solution did not get backing from his fellow Commissioners and WSJ reports that he has withdrawn his proposal for now.
Also Spain felt the weak investor appetite for non-German eurozone debt. Spanish 10y yields rose to 6.27% and the spread to Germany widened to 453bp. Spanish bonds are now in the danger zone for a haircut from LCH clearnet. It was new margin requirements from LCH that initially pushed Italian bonds above 7% last week.
The eurozone grew a decent 0.2% q/q in Q3, but the full effect of the current debt crisis will not be visible until data for this quarter are ready. The sharp drop in eurozone industrial production in September reported on Monday and weak PMIs reported last week indicate that expansion was already slowing dramatically going into Q4, see Flash Comment: Decent growth in Q3 – don’t get used to it! As a consequence of the weak growth outlook we changed our interest rate forecast yesterday. We now expect the ECB to cut rates in both December and January, which will for the first time ever bring the refi-rate below 1%. We are now basically calling for zero rates in the eurozone as the important deposit rate is expected to be lowered to just 0.25%, see Research: ECB set to cut rates to record lows. The weak growth outlook and de facto zero rates are also expected to weigh on the euro, and we have lowered our EUR/USD forecast to 1.30 on a 3M horizon.
But it was not all gloom and doom yesterday. US retail sales rose 0.5% in October and the Empire survey pointed to expansion adding to hopes that the US can decouple from an expected European recession. S&P rose 0.5%, but Nikkei down 1% this morning.
Global Daily
Focus today: Markets will continue to watch the political developments in Italy, where Mario Monti today is expected to present his new government. In Greece the Papademos government is expected to be approved by the parliament in a confidence vote. Neither of these events is likely to be able to turn sentiment in a more favourable direction. In the short run only signs of more aggressive bond purchases by the ECB in the secondary market appear to be able to turn sentiment around. In Europe we have a light calendar today with main focus on the Bank of England‟s inflation report and final euro area consumer prices for October. In the US consumer prices and industrial production for October will be released this afternoon.
Knowing that inflation has peaked and having received Governor King‟s letter to the Chancellor yesterday, the sting has been taken out of Bank of England‟s inflation report. We do not expect any bold measures to be announced but still recommend to keep an eye on the presentation of the report, which previously has been a market mover.
Fixed income markets: The European debt crisis is worse than ever. Even the core of the core countries is now widening relative to Germany and most eurozone sovereign markets are trading with very thin liquidity. Yesterday German 2yr Schatz yields touched new record lows. We have published a new yield forecast and now expect that the ECB will cut to 0.75% in January. With data continuing to deteriorate and the debt crisis running rampant, we see room for lower rates in Germany and the EUR swap curve in the coming three to six months. In our view, only a step up in ECB purchases can re-establish confidence in the eurozone sovereign bond markets and send yields higher. The recent signs of improvement in the US economy are encouraging though, and supports our view that the spread between long US and German yields is set to widen further. Watch out for the Portuguese t-bill auctions at 11:30 today.
FX markets: The European debt concerns and the outlook of a eurozone recession in Q4 continue to put pressure on the euro and EUR/USD has fallen below 1.345 overnight. Our new forecast that the ECB will cut the refi rate to a historical low of 0.75% and de facto introduce zero rate policy is expected to weigh further on the euro over the coming months. Hence, we now expect that EUR/USD will fall to 1.30 on a 3-month horizon, see FX Forecast Update that was published yesterday. Before the SNB introduced the 1.20 minimum target in EUR/CHF the franc would have strengthened significantly on a day like yesterday. However, growing speculation that the SNB might lift the target as early as December kept EUR/CHF well supported close to the 1.24-level. Hence, it leaves the market with JPY as the only true safe-haven currency. In that respect the BoJ did little to mitigate the safe-haven flows at today‟s monetary policy meeting. As expected the policy board kept its zero rate policy unchanged and cut its economic assessment due to global slowdown fears. However, it did not introduce new measures to fight the appreciating yen. We forecast that BoJ will have to accept USD/JPY sliding to a record low 74 over the next six months.
Scandi Daily
No key data releases in Scandinavia today.