Market looks like it is already on holiday today. The Euro remains weak, but risk appetite remains buoyant despite yesterday’s disappointing reaction to the ECB LTRO. Dare we hope for a chance to snooze until after the New Year celebration?
The Euro continues to wallow in the mire as yesterday’s negative Italy GDP print for Q3 reminds us what awaits for the Italian economy in coming quarters as the final procedural hurdles are cleared today in the Italian parliament for Monti’s EUR 30 billion deficit reduction scheme for next year. The eventual goal is a balanced budget in 2013, but we can’t be sure that the growth and accompanying tax revenue assumptions (some of the new budget plan includes measures aimed at reducing cheating on taxes) will be met. One industry lobby (Confindustria) has estimated that the economy will shrink -1.6% next year. What if it’s more like -2.5% and tax revenues fall short? More importantly for the nearer term, Italy faces tremendous debt issuance needs to keep itself funded over the next few months. The next auction of medium to long term Italian bonds is up already next Thursday.
Euro sovereign debt spreads were generally quiet today after yesterday’s sharp re-widening in the wake of the announcement of a huge take-up at the ECB’s first 3-year LTRO. We’ve seen endless noise of late on the prospects of a French downgrade and what it might mean, but the French bond market today was more than orderly, with the 10-year yield easing a few bps lower.
Meanwhile, article out late yesterday from Reuters reminds us of the still critical situation in Greece, where PM Papademos must ram through key reforms to guarantee that Greece receives its next round of funding from the troika bailout deal. The country may have a general election as early as February and we all have to wonder how far we are into the countdown to Greece leaving the EU.
Odds and ends
Swiss lawmakers late yesterday voted in an extraordinary session against measures aimed at preparing the way for negative interest rates, for now eliminating this approach to discouraging investors from placing their cash in Switzerland. But they did ask the SNB to act again on the strong franc and raise the EURCHF floor further from 1.20. EURCHF traded in a tight range – relatively bearish for CHF, actually, considering the news flow and the very weak Euro on the latest news.
Despite all of the positive US data releases of late and near record higher in Citibank’s economic data surprise index, the broad Chicago Fed measure of the US economy continues to show negative readings, with the release of today’s November reading suggesting the weakest activity level in three months.
The US weekly jobless claims were once again better than expected, setting a new low for the cycle and continuing to suggest a further stabilization/improvement in the US job market. The next few weeks of data are extraordinarily adjusted for seasonality and will be interesting to watch.
Looking ahead
Most of Europe and North America are looking forward to not thinking too much about markets and taking time off to be with their families for the holidays (and with Christmas Eve and Christmas Day and New Years Eve and New Years Day on Friday and Saturday, it’s a classic “Employers’ Holiday” season this year). But so many questions await in the New Year that it still feels like a significant story can shake up this market at any time. Our upcoming Outlook for Q1 bears the title “The Perfect Storm”, so you get the idea. And our Outrageous Predictions for the New Year also give an idea of some of the scenarios we suspect are under-appreciated for the coming year.
It is very interesting to note USDJPY poking the upper end of the range above 78.00. There’s no real news to account for this development. This drift into a potential zone of stop loss orders comes as markets are already very thin and as Japan has the day off on Friday for the Emperor’s birthday. Sounds like a potential recipe for volatility tonight and tomorrow – so be careful out there. I just noticed that short-dated USDJPY option volatility has dropped to the lowest level since mid-2007. Something is brewing soon in the JPY – it’s been too quiet. But when will soon be now?
Otherwise, let’s hope we have a quiet transition over the next 10 days into the New Year, where the fireworks are held off until at least Jan 2 or later!
Economic Data Highlights
Sweden Nov. PPI out at +0.8% MoM and +0.3% YoY vs. +0.5%/+0.1% expected, respectively and vs. +0.3% YoY in Oct.
Norway Dec. Unemployment Rate out unchanged at 2.4% as expected
UK Q3 Final GDP estimate raised to +0.6% QoQ vs. earlier estimate of +0.5%
UK Q3 Current Account out at -15.2B vs. -6.1B expected and -7.4B in Q2
US Nov. Chicago Fed National Activity Index out at -0.37 vs. -0.17 expected and -0.11 in Oct.
US Weekly Initial Jobless Claims out at 364k vs. 380k expected and 368k last week
US Weekly Continuing Claims out at 3546k vs. 3600k expected and 3625k last week
Upcoming Economic Calendar Highlights (all times GMT)
US Weekly Bloomberg Consumer Comfort Survey (1445)
US Dec. Final University of Michigan Confidence (1455)
US Nov. Leading Indicators (1500)
US Oct. House Price Index (1500)
China Dec. MNI Business Sentiment Survey (0135)
John J Hardy
SAXO BANK