- G-8 summit embraces further emphasis on measures to support growth but fails to produce concrete results.
- Risk appetite continued to retreat on Friday, as US stocks posted their third weekly loss in a row.
- Sentiment remains fragile as focus turns to the EU summit on Wednesday. Market stress is likely to remain elevated ahead of the 17 June elections in Greece
Markets Overnight
The EU debt crisis was at the top of the agenda at the G-8 summit over the weekend but there were few concrete results. US President Obama joined the newly elected French President Hollande and UK Prime Minister Cameron in embracing further emphasis on measures to support economic growth, while there were no signs that Germany’s insistence on austerity measures was softening. Hence, divisions on the way forward persisted at the Camp David summit and on Greece, the concluding statement merely affirmed that the country should remain in the EU, while respecting its commitments.
Focus now turns to the EU summit on Wednesday, as the pressure on Germany to soften up its stance seems to be increasing. According to Financial Times, several controversial proposals are back on the agenda, including empowering the EUR500bn EU rescue fund to directly inject capital into the banking sector, unlimited purchases of Spanish and Italian government bonds through ECB and the mutual issuance of euro-zone bonds. Particularly the last po int has received renewed attention after French President Hollande said on Saturday that he would call for EU bonds at this week’s summit.
Risk appetite continued to retreat on Friday, as US stocks posted their third weekly loss in a row, thereby posting their longest losing streak since August. Not only did developments in Greece weigh on sentiment, but also the impact of positive drivers has faded recently with the US earnings season drawing to an end, concerns over a Chinese slowdown still lingering and some softness in US economic data recently. This morning, however, sentiment has improved in Asian trading, spurred by comments from Chinese Premier Wen Jiabao that China will focus more on supporting growth.
The trend lower in US bond yields slowed on Friday, after a week with big long-end gains for Treasurys. The 10-year yield rose 3bp, while front-end yields were largely unchanged.
Safe-haven currencies were the best performers on Friday, as USD and JPY posted gains versus their G10 peers. This morning ,JPY has continued to hover close to a three-month high versus USD, as USD/JPY fell to 79.00 on Friday. EUR has recovered quite a bit, after EUR/USD traded close to the 2012 low of 1.2624 on Friday.
Global Daily
Focus today: With a very light data calendar today risk sentiment will drive markets. We expect to see continued high uncertainty and stress in the markets as we await the Greek election on 17 June. Contagion to other debt-burdened euro area countries is the big issue, especially in Spain, where the financial sector is facing continuing challenges. Otherwise markets are likely to look ahead to the informal EU summit on Wednesday and the release of flash PMIs for the US, Euroland and China on Thursday. Data on the global manufacturing sector have been mixed lately and Thursday’s data should provide more clarity on the current strength of global production.
Fixed income markets: We expect to see market pressure continue to build into the EU summit on Wednesday evening, as the markets will continue to price in a higher chance of Greece leaving the euro-zone; hence we are looking for more curve flattening, new records in Bunds and Treasurys, higher yields in Spain and Italy, pressure on bank shares, increasing costs of getting USD off-shore, lower rates in Denmark and strengthening of DKK etc. We expect things to get worse and the markets will soon be looking for ECB action to stop contagion.
In the FX markets it is all about risk-off at the moment and we would certainly not recommend to go against the trend today. Hence, look out for downside for EUR/USD, EUR/GBP and the cyclical and commodity-sensitive currencies. The rush into USD and to a lesser degree JPY is expected to continue today. The so-called IMM or CFTC data showed that in the week that ended 15 May speculators added strongly to short EUR/USD positions. Bearish bets against the euro rose to 173,869 contracts up from 143,984 a week earlier; hence, even though the market is exceptionally short the euro, we believe that new shorts will be added this week and we repeat the message from the past couple of weeks: consider hedging the risk of strong moves lower in both EUR/USD and EUR/GBP.
Last week also showed that the otherwise lauded Scandies are not the place to hide when risk aversion spikes. Neither SEK nor NOK offer the liquidity demanded from a truly safe-haven currency. Hence, if risk aversion continues to dominate, look out for further upside for both EUR/SEK and EUR/NOK despite both crosses looking too high given the strong fundamentals of Sweden and Norway.
If we were to choose a Scandi pair we prefer EUR/NOK (NOK/SEK) or in fact we would choose EUR/DKK as the best hedge against the current euro turmoil. In respect of EUR/DKK we are now trading at or close to levels that earlier have triggered intervention and subsequent rate cuts from the Danish central bank. It underlines that an independent Danish rate cut could come sooner rather than later if the downward pressure on EUR/DKK continues.
Scandi Daily
Norway: Norges Bank announced last week a new issue of a government bond with 11-year maturity. The auction is due to take place today. The total issuan ce is NOK10bn, of which NOK6bn is due to be auctioned. This is standard volume for a new Norwegian issue. Fundamentally speaking, there are not many places in the world where one can buy AAA-rated government bond debt for yields at 2% or above. As such, this bond issue should offer good value and given the euro turmoil we think this is an excellent opportunity to get some true Triple A stuff. A further argument is that the auction calendar for Norwegian government bonds becomes very light over the summer. There will be two more auctions in June, none in July and then another two in August. The light supply might lead to Norwegian bonds trading higher over the summer, especially if there is a strong international demand for such papers as we expect in this period.
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