Data has Positive Influence on the Market

Positive European and US data releases led stocks to their first gain this week

Sovereign spreads tightened on the European bond market

Equity markets are generally higher in Asia this morning

Thin data calendar today with US CPI as only key release

Markets Overnight

European PMIs surprised positively yesterday with the eurozone composite increasing from index 47.0 to 47.9 – and even a small improvement in the important new orders sub index. One data point does not make a trend, however, and the PMI survey data still indicate declining growth. In other words, while it is encouraging that the sharp growth slowdown may be losing speed it is still too early to say with certainty how long or deep the European recession will be.

Yesterday’s US data were also better than expected with increases in both the Empire and Philadelphia activity surveys. Even more positive was the drop in initial jobless claims to 366,000 – the lowest since May 2008. This supports our call that the US economy will stay clear of a recession, and while November industrial production disappointed with a 0.2% decline, the general positive data releases helped US stock markets to their first gain this week – the S&P500 index was up 0.3%.

Recent months’ better-than-feared US data have taken the US economic surprise index back to almost its March high. Improving US data is the main reason for our forecast of US bond yields rising gradually next year – although the direction on the bond market remains a battle between positive US data surprises and increased financial stress on the back of the European debt crisis (see Yield Forecast Update – December).

European bond markets saw some relief after the Spanish auction yesterday and 10-year spreads to Germany narrowed across the board: Italy (-25bp), Spain (-28bp), Belgium (-21bp) and France (-13bp). Short-term relief does not, however, remove the important near-term event risk of several sovereign downgrades in the eurozone.
The gold price rebounded slightly yesterday posting a 1% gain, but the downtrend is not yet broken and the precious metal is down almost 20% from its September high. Sentiment remains bearish as reflected by only 10 out of 21 analysts surveyed by Bloomberg expecting gains next week and by the negative skew on the option market (gold put options more expensive than similar call options).

Global Daily

Focus today: We have a thin global calendar today with US CPI as the only interesting release. However, there will be a couple of interesting speeches. In Rome Draghi, King and Regling will be gathered and it will be interesting to hear whether Draghi will repeat the message from yesterday that “we want to make it absolutely clear that in the present conditions where systemic risk is seriously hampering the functioning of the economy, we see no stigma attached to the use of central banking credit provisions: our facilities are there to be used”. This is a sharp change in the tone from the ECB that previously has used the term 'addicted bank' which actually stigmatized these facilities. This change implies that a large allotment on next week’s 36-month LTRO is likely to be seen as something positive. In the US, Evans and Fisher will be speaking. Over the next months it will in particular be the possible change in communication (e.g. introduction of a rate path) that will be in focus.

Fixed income markets: Mario Draghi is clearly trying to boost appetite for the 36M LTRO, which is one key near-term event for European rate markets - the allotments will be announced on Wednesday. While markets saw some relief following the Spanish auction yesterday, we do not know how sustainable this is. There has been some market talk that France might be downgraded tonight, when markets are closed, and while a downgrade to some extent should be priced into the markets we would expect a negative reaction. Also keep an eye on fixings this morning. It appears that a small downtrend in Euribors has been established, while USD Libor continues to inch higher indicating tension.

FX markets: The Swiss National Bank left the minimum target unchanged at 1.20 yesterday causing EUR/CHF to fall more than 1% to 1.2250. Further selling has been seen overnight and considering that the market was very short Swiss franc going into yesterday’s meeting the market could very well test 1.2200 today. There were few surprises in the SNB statement and while the central bank did revise its inflation forecast lower there was no “smoking gun” and a hike of the 1.20 floor appears somewhat less likely – though increased deflation risks still holds potential for action in 2012. The NOK sell-off after the surprise 50bp rate cut has continued taking NOK/SEK towards 1.16. We still like the upside, however, and next week’s Riksbank meeting could very well be the trigger that sends the pair higher again.

Scandi Daily

Denmark: The Danish central bank, Nationalbanken, yesterday cut the lending rate by yet another 10bp to a new record low of 0.70%. The rate cut came after the central bank once again had purchased currency in the market to mitigate the strong DKK inflow. We expect the DKK positive inflow into Danish bonds to continue. In our view, the latest rate cut will do little to deter inflows, as the flows are mainly safe-haven related. When that is the case interest rate differentials matter very little.
Hence, it might be just a matter of time before Nationalbanken is forced to lower rates once again, thereby pushing Danish policy rates even closer towards zero. In general, the rate cut yesterday underlines that Nationalbanken is not ready to accept neither a stronger DKK, nor a significant build in currency reserves - at least as long as rates still can be lowered.