- Stock markets and bond yields lower on slightly softer European PMI and a cautious view on Greece.
- Oil prices continued to rise to a nine-month high.
- Germany fights increase of EU bailout fund, while G20 likely to increase pressure for higher EU firewall.
- Obama and Romney present rivalling tax plans.
- Focus today on German Ifo index, US initial jobless claims and Swedish confidence data.
Equity markets retraced somewhat yesterday as euro area PMI data disappointed and the market is taking a more cautious view on Greece after a long period of strong performance. S&P500 finished down 0.3%. In Asian trading the S&P500 future is broadly unchanged, while most Asian indices are slightly lower.
Oil prices reached a nine-month high yesterday rising to just below USD123 per barrel (Brent) as Iran denied officials from the International Atomic Energy Agency access to a military base – see Bloomberg.
Germany continues to resist an increase of the EU bailout fund of EUR500bn despite strong pressure from the other euro countries and IMF- see FT. A spokesman for Angela Merkel yesterday said that the German position had not changed and that an increase was not necessary. At the same time WSJ reports that G20 finance ministers plan to increase pressure on Europe to increase the size of the bailout fund. G20 finance ministers and central bank governors will meet in Mexico over the weekend.
Yesterday US president Obama and leading Republican candidate Mitt Romney both presented rivalling tax reform plans – see FT. Obama wants to cut the corporate tax rate to 28% from 35% and impose a minimum tax on profits US companies earn in offshore tax havens. Romney is proposing aggressive cuts to personal income tax rates.
Bond yields fell most of the day with the US 10-year treasury note declining 5bp during the day to yield 2.0% at the end of the US session. Weaker equities and a strong 5-year auction pushed yields lower. In the Asian session the market has turned a bit though, and yields are now broadly unchanged from the European close.
FX markets have been fairly quiet overnight with EUR/USD broadly unchanged and USD/JPY and EUR/CHF slightly lower. Scandi currencies have not moved a lot overnight after SEK weakened yesterday on weaker sentiment and NOK strengthened supported by higher oil prices.
Global Daily
Focus today: The markets will likely digest further the news from Germany resisting an increase in the bailout fund and the disagreement with IMF and other euro countries. Germany clearly wants to keep the pressure intact on countries with budget problems and is therefore reluctant to measures that would make the euro crisis ease too fast.
The German Ifo index is (10:00 CET) is expected to continue to show a further increase pointing to improving activity after the weak end to 2011. The most forward-looking subindex is the Ifo expectations index where we look for a rise to 103.5 in February from 100.9 in January. Market expectations may be dented a bit following the weaker-thanexpected euro area PMI yesterday. US initial jobless claims (14:30 CET) are expected to rise slightly to 355k after falling to a new three-year low last week at 348k. The downward trend in claims supports the picture of a stronger US labour market.
Fixed income markets: The US Treasury and German bond markets saw strong demand yesterday as US housing data were soft and European PMIs were slightly downbeat. Further, there appears to be ongoing doubt that the Greek bailout will resolve the sovereign credit crisis. In sum, the initial attempts to sell the bond markets after progressing on the Greek package earlier this week have not seen material follow-through and this is likely to have raised the bar on the positive news required out of Europe to reverse the flight-to-quality buying. The weekly initial jobless claims released today are likely to be the most important piece of data out of the US this week in terms of expected market reaction. The recent trend has been toward lower claims, and even a minor increase in today’s reading lowers the four-week average to the lowest since early 2008. A decline in the claims data would in our view be bearish for Treasuries as it would underpin the improvements seen in the US labour market and lift expectations for the February non-farm survey. There is a seven-year US Treasury auction today (USD29bn), and in Sweden the SGBi 0.25% Jun/22 inflation-linked bond is tapped for an estimated SEK750m.
FX markets: BoE Minutes released yesterday confirmed that the probability of additional QE is fairly high. Posen preferring to lift the asset purchase target by more is not a surprise, Miles pushing for additional QE is interesting, and previous hawks Weale and Dale going with the majority is comforting. The spike in EUR/GBP was completely after the book; the likelihood of additional asset purchases has increased dramatically and the bias is the opposite of what the market thought. There was actually a risk that the BoE could have done more than the expected 50bn earlier this month. Hawks have their wings clipped, rate hikes are not on the agenda before 2014 and we feel comfortable with our current forecast of EUR/GBP rising back above 0.85 before summer.
Scandi Daily
This morning Swedish February business and consumer survey will be released. There may be some upward correction in the data, but we believe this will be temporary. The reason is that we see some retracement in German PMI which is likely to impact Swedish business sentiment soon. There are some minor bright spots though: retail trade and consumer confidence have moved up over the past months, albeit from low levels. Unless there is a dramatic change, these data should not alter the picture that Riksbank is set to cut rates again in April.