Short-Lived Relief from ECB Liquidity

Short-lived relief from the ECB liquidity injection yesterday. US equities ended the day with a modest gain, but Asian markets are in negative territory this morning.

US bond yields on the rise after a poor auction yesterday. The euro is still under pressure as yesterday’s 3y LTRO is viewed as too limited to solve the EU debt crisis.

Focus today will be on the joint press conference between ECB’s Draghi and BoE  King.

Yesterday Hungary was downgraded to junk status by S&P. Fitch is expected to
follow shortly.

The US equity market rose for a second day as higher oil prices lifted energy shares and Bank of America settled a case with the US Justice department, helping the equity market recover from an earlier slump due to a lower-than-forecast result from Oracle. There were also better-than-expected economic data as Housing starts rose more than forecast. Hence, S&P500 ended the day with a modest rise of 0.2%. 

However, this has not been followed by the Asian equity markets this morning. Most markets have declined as the injection of liquidity by the ECB yesterday is viewed as too limited to solve the EU debt crisis.

US Treasuries declined after lower-than-average demand at the 7Y US treasury bond auction. The bid-to-cover was 2.68 versus 3.2 the last time and average above 2.8 during the past 10 sales. Hence, we saw a modest rise in US bond yields from around 2bp in the 2Y segment up to 7bp in the 30Y segment.

In the currency market movements have been limited in the Asian trading session this morning. The euro remains under pressure as the ECB’s measures to support its banking sector are not seen as being sufficient to stop the region’s worsening sovereign-debt crisis. EUR/USD is trading at 1.30 this morning, while USD/JPY has been fairly stable at the 78-level, and movements in SEK and NOK have also been stable against the euro. EUR/NOK is trading at 7.71 and EUR/SEK is trading at 8.98 this morning.

Global Daily

Focus today: We have a thin calendar today so speculation on S&P’s final verdict on France and the EFSF could attract some attention again. ECB President Draghi and BoE Governor King will hold a press conference in Frankfurt after a meeting of the European Systemic Risk Board. Although it is not the topic it will be interesting to hear whether Draghi will elaborate on yesterday’s LTRO. In the US the University of Michigan Confidence is expected to continue  its rising trend. It will also be interesting to see whether the very low level of initial jobless claims can be sustained. Consensus expectations are a minor increase to 380K up from 366K last week. In general US data have been surprising positively recently, but the labour market remains weak.

Fixed income markets: Markets turned sour again yesterday after the LTRO allotment despite the bigger-than-expected take of liquidity. Investors are probably cautious about taking on more risk going into year-end provided the current very uncertain environment and usual thin markets at this time of the year. Hence, it is probably still too early to judge the impact from the LTRO and we might have to wait until next year to see the full effect. Given the large amount of liquidity allotted we expect to see Euribor fixings starting to decline at a higher pace. We saw a small downtick yesterday and it will be interesting to
see how much the fixing will move down today. Focus will be on Draghi and King’s press conference. Also watch out for any news out of the US regarding the extension of the payroll tax cut and the unemployment benefits. If Congress does not agree on this before Christmas, it would have a negative impact of 1.5% on annualized US Q1 GDP.

FX markets: In the FX market attention will be on the speech by ECB President Draghi. The market will scrutinize it for hints regarding the outcome of the next monetary policy meeting and his view on yesterday's LTRO. After the initial jump in EUR/USD after the LTRO announcement yesterday the cross has fallen back towards 1.3040, just above the psychologically important support level at 1.30. The Swiss franc came under temporary pressure yesterday after the Swiss Finance Minister said a panel is considering measures, including capital controls and negative interest rates, to weaken CHF. We forecast that the SNB will be successful in weakening the franc somewhat during 2012. See in that
respect FX Forecast Update that we published on 20 December.   

Scandi Daily

Sweden: SCB will release November PPI data today. We expect prices to have gone up by 1.0% from October. The rise is partially due to seasonal gyrations and partially due to higher electricity prices pushing home market prices higher.

Norway: The non-seasonal adjusted unemployment numbers out of Norway are not expected to attract much attention. However, an unchanged level of 2.4%  of the unemployment rate underlines that the Norwegian labour market is still very tight.