Market movers today
In the UK, the PMI services index for January will give us a first glimpse into how the economy started out in 2019. Amid the ongoing Brexit uncertainty, we think the index will be broadly unchanged around 51.2.
In the US, keep an eye on the US ISM non-manufacturing for January, where consensus is for another decline in line with the move from the earlier released Service PMI.
The final January Service PMIs in the euro area are also due, including first readings for Spain and Italy, but more interesting will probably be whether December retails sales remained on the downward trajectory of the past months.
In Sweden, focus is on the PMI for January and industrial production figures for December, which we believe will have taken a hit. In Norway, we estimate housing prices were more or less unchanged in January.
Selected market news
Risk sentiment continues to be well supported with US equities ticking higher, although there was little market news. Most of Asia is closed for their New Year's celebration. The S&P reached its highest level since early December, although at very low market volumes. Recently, equity markets have been bolstered by dovish signals from global central banks and positive signals from US-China trade talks. Federal Reserve Chairman Jerome Powell met President Donald Trump at the White House for dinner on Monday to discuss recent economic developments and the outlook, but the central bank said the Fed Chief did not share his expectations for monetary policy ( see Bloomberg story here ). The meeting was initiated by President Trump and comes after he strongly criticised the Fed for following a too tight monetary policy just before Christmas, which exacerbated the equity market sell-off at the time. The Fed has recently removed its forward guidance of 'further gradual increases'. We agree the Fed is on hold for now, but still think it will raise rates this year as the US economy continues to grow above potential and labour markets continue to tighten.
Yesterday, oil prices dropped back with Brent falling to USD61.5/bbl after touching USD63.5/bbl briefly in the start of the day. The move comes after Russia's Energy Minister Alexander Novak indicated that Russia is committed to reaching the output target by May. Elsewhere, Venezuela's defaulted 2027 bonds fell as Spain, Germany and the UK led a host of European countries in recognizing National Assembly leader Juan Guiado as the country's Interim President on Monday. Interestingly, Italy refrained from recognising Guiado as president, pointing to the strained relationship between the new Italian government and traditional EU allies. However, oil prices session halted their decline later in the trading as traders weighed output cuts from OPEC and its partners against expectations for rising US crude inventories.
Scandi markets
Norway. We estimate housing prices were more or less unchanged in January after the surprise increase in December, with a strong supply side keeping prices in check. However, the risk is to the upside as OBOS reported prices in Oslo rose 3.3 % (nsa) in January.
Fixed income markets Yesterday, the ECB published data for reinvestment purchases in January. Not surprisingly, there was a decline in the holdings of German, Dutch and Spanish bonds given large redemptions in these countries during January. However, there was a solid increase in Italian and French bonds even though there are no redemptions in these two countries until February (France) and April (Italy) given our estimates of the PSPP holdings.
Today, Finland is coming to market in a new 10Y benchmark. We expect a significant bidto- cover as Finland will sell only EUR3bn at the syndicated transaction. We expect it to be priced at -24bp to -26bp to midswaps (Euribor 6m). See FI Research: Finland to launch a new 10Y benchmark, 4 February 2019.
The February 2019 refinancing auctions continue today and all the mortgage banks (Nykredit, RD, Nordea Kredit, Jyske Realkredit and DLR Kredit) will be in the market selling DKK27.3bn in DKK-denominated non-callable bullet bonds and EUR149m in EUR-denominated non-callable bullet bonds. Of the DKK27.3bn in DKK-denominated bonds, DKK13.8bn, DKK8.8bn and DKK1.9bn will be sold in 1Y, 3Y and 5Y bonds, respectively.
FX markets
In the Scandies, a turnaround in oil limited yesterday’s NOK losses with EUR/NOK firmly back in the 9.60s. As we have emphasised over the past sessions, NOK looks technically overbought on momentum indicators and we would not be surprised to see the NOK rally lose a little steam short term. In today’s session, Real Estate Norway’s house price release is unlikely to trigger any spot move even if the case for further rate hikes could improve (see chart).
EUR/SEK broke through 10.40 for the first time since late October and remains overbought in our view. On the other hand, we are hard pressed to identify a trigger for a turnaround of the SEK, at least in the short run. Hence, in the current low-volume environment, the cross may well trade even higher even if interest-rate differentials suggest otherwise, especially if Swedish macro continues to disappoint. Thus, a stronger SEK may take somewhat longer to materialise than we anticipated previously.
Data out yesterday showed that Danmarks Nationalbank sold DKK1.9bn FX reserve in intervention in January – a small bit compared to the DKK12bn in December. The intervention is likely to have occurred at the beginning of the month where DKK traded at a weaker level. Since then, DKK has strengthened some vis-à-vis EUR and we stick to our call that we will not see an independent rate hike in Denmark this year.
