Key news- Risk sentiment is slightly negative this morning after weaker-than-expected ISM in the US on Friday and renewed concerns about Greece.
- Press reports over the weekend suggest that PSI participation in the Greek debt swapcould fall substantially short of 75%.
- Putin secures a clear win in presidential election, but market reaction will probably depend on the opposition‟s ability to rally protest in the coming days.
Markets overnight
Moody‟s late Friday cut Greece‟s sovereign debt rating from Ca to C – the lowest possible rating by Moody‟s. According to the rating agency, the debt swap agreement represents “a distressed exchange, and hence a default”, see Bloomberg. According to several press reports over the weekend, the PSI participation in the debt swap could fall substantially short of the targeted 75%, see Financial Times. A Greek government official confirmed on Sunday that Greece plans to hold a general election on 29 April or 6 May.
As expected, Vladimir Putin won a clear first round victory in connection with the presidential election in Russia on Sunday. However, the opposition is claiming widespread irregularities, see Financial Times. Market reaction will probably depend on the opposition‟s ability to rally protest against Putin and the election result in the coming days. The opposition has already announced plans for a mass rally on Monday night.
In China, in connection with the opening of the National People‟s Congress this morning Prime Minister Wen Jiabao announced that that target for GDP growth in 2012 will be cut to 7.5% from 8.0% in 2011, see Bloomberg. It should be stressed that this „target‟ should be regarded as a lower bound for GDP growth rather than an actual forecast for GDP. Nonetheless, the lower growth target is an acknowledgement that China‟s potential growth is poised to slow in the coming years. The inflation target for 2012 was set to 4% as in 2011. With inflation set to drop below 4% in February, this will leave room to ease monetary policy if needed.
Risk sentiment remains slightly negative this morning after weaker - than - expected ISM in the US on Friday. The US stock market closed lower on Friday with S&P 500 finishing down 0.3%. US stock futures have continued to edge lower in early morning trade and most Asian stock markets are in negative territory this morning with Nikkei and Hang Seng down 1.0% and 1.2%, respectively. US bond yields have edge modestly lower since the markets closed in Europe on Friday with 10-year US-bond yields down 1bp to 1.98%.
In the FX markets, EUR/USD has also continued to move lower, albeit only modestly since markets closed in Europe on Friday. EUR/USD is trading at 1.319 this morning. JPY has strengthened slightly and USD/JPY is trading at 81.35 this morning. In the Scandinavian currencies, both NOK and SEK have strengthened slightly against EUR since Friday.
Global Daily
Focus today: Today we will get final service PMIs for February from a range of
European countries and as well as US non-manufacturing ISM. We expect nonmanufacturing ISM to show a modest setback following a surge in January although we believe that the US recovery remains on the right track in the months to come. UK service PMI is expected to show a similar retrenchment. Spanish and Italian service PMIs will be watched for tentative signs that the debt crisis scare is calming a bit in these countries. Euro area sentix investor confidence, which is normally not followed closely, could give a hint of whether sentiment improved more strongly in late February. Euro area retail sales are expected to be broadly unchanged from December to January. US factory orders for January are also due, with consensus expecting a drop of 0.9%. The ECB‟s Genzáles-Páremo will speak about “economy, innovation and the future” in Madrid (10:30 CET) and the Fed‟s Fisher will speak about “the state of the economy” in Dallas (19:00 CET).
Fixed income markets: The long end continues to trade in a relatively tight range. The attempted sell-off in the US bond market in the middle of last week did not succeed, as the economic data was not strong enough to go with it. In Europe, the pace of the decline of the Euribor fixings increased and Spanish and Italian bond markets continued to rally in the wake of the 3Y LTRO. Despite these signs of easing stress in the market, the long end moved into the low part of its range – perhaps reflecting the more mixed economic newsflow and more a tempered risk environment. With a light start to the week and some fresh economic concerns out of China this morning, the long-end lows might be tested before the ECB meeting on Thursday and the payrolls report on Friday. Overall, we expect the current ranges to hold for the next few days at least.
FX markets: Bernanke caught markets somewhat by surprise last week, as the Fed chairman did little to signal additional near-term stimulus. This should perhaps not come as a surprise given the strong improvement in US economic data in recent months, but with plenty of investors looking for QE3 it was still enough to push the dollar higher. We doubt, however, a reduced likelihood of QE3 will be enough to trigger a renewed dollar rally and maintain our call for modest dollar depreciation through 2012. The obvious currency pair to watch is USD/JPY as this remains largely a function of the relative monetary policy between the US and Japan. Note that non-commercial investors have turned net short JPY for the first time since last summer according to the IMM data.