Asian stocks are on the rise on the back of fairly strong Chinese GDP numbers this morning. The y/y rise in Chinese GDP came in above consensus at 7.3% and at 7.4% for the year of 2014. Industrial production surprised with +0.5% y/y on the upside and retail sales were also strong.
Stocks have reacted to this, though nowhere near enough to offset yesterday’s losses. The Shanghai Composite index is up just under 1% this morning.
With the US honouring Martin Luther King, news yesterday were to come from Europe. And they did, though not from the most usual source. The Danish National Bank cut its rates by 15bps after sessions with heavy intervention in the FX market. Denmark had been priced towards a cut on the back of the expected ECB-QE on Thursday, and another cut might well come there as well. Expediting it to yesterday must be seen in the context of SNB’s action of last week. Who is next? It might well be Denmark again.
Finnish PM Stubb made it clear that Finland would not accept a write-down of Greek debt and that the new government should not expect to be offered one. Easing the conditions can only be considered if the new government sticks to the reform plans – a position certainly shared by the German government.
Angela Merkel would not call this “a week of destiny” for the Euro area and stressed the ECB’s independence. That sounds like silent agreement with QE. However, the German government has likely pushed for a scheme where national central banks assume the risk of bond purchases. German business organisations and most media remain critical of QE in any shape or form.
Day and week ahead
There are again relatively few data on the agenda. The ECB will publish the latest results of the lending survey at 10.00 CET, probably highlighting once again that weak demand is a key reason for sluggish lending activity.
In line with the consensus, we expect a further rise in German ZEW expectations (11.00 CET), driven by lower oil prices and the weaker EUR.
It is a very quiet day in terms of US data. The consensus expects a small increase in the NAHB housing index.
For Turkey, we expect no rate change, but there are clearly risks of a rate cut after PM Erdogan last week called on the CBT to start lowering rates.
Rates
The Danish central bank cut the lending rate and the interest rate on certificates of deposit by 15 bp. We had been anticipating the move for some time, but the recent actions by the SNB last week clearly forced the hand of the Danish central bank. Moving now before Thursday’s ECB meeting is a surprise, though, and leaves the door wide open for further cuts following the ECB meeting.
Keep a keen eye on the DKK versus the EUR; if we continue to see further appreciation, it is very likely we will see additional cuts, and the likelihood is a further flattening of the Danish swap curve.
The Danish swap curve had already during the day dropped significantly with the announcement from the Danish central bank just accentuating the rate movements resulting in additional tightening of 2-3 bp. The DKK 1Y swap ended at 0.25% dropping by 10bps. The 10Y broke into new lows, down 10 bp on the day ending at 0.95%.
Eur swap rates held largely still yesterday, but of notice is the drop in the Euribor 1M fixing to now -0.2bps, its first negative reading ever. The Eonia fixing yesterday evening increased a little, to now -7.5bps.
In the EUR government space core and semi-core curves steepened a little with the 30Y out by 2bps. The periphery flattened as theshort end widened by 2-3 bps.
FX
The EUR was among the outperforming currencies yesterday, gaining more than 0.5% versus the USD, although the action was limited and not interpretable due to the US holiday. Further, the move has been all of offset this morning, with EURUSD in 1.1572.
The ECB’s QE could ultimately spark the “buy on rumour, sell on fact” reaction, with a correction to above 1.18. The ECB’s lending survey is the key release today, further improvements could actually ease the pressure on the ECB to act aggressively going forward, potentially helping the EUR rates and thus the EUR.
The NOK lost more than 1% yesterday, as the oil price advance has stalled. The SEK depreciated too. Both probably due to the lack of liquidity rather than any particular news. We still see chances that both will gain on ECB QE. Eventless day locally otherwise.
Pressures on the DKK yesterday were released with the interest rate cut from the Danish central bank which, just like the SNB, is likely acting preemptively ahead of the ECB’s meeting on Thursday. The move alleviates the pressure to intervene. We are not certain at all that this will be enough to stabilise the DKK – the central bank could cut rates again on Thursday. Indeed, the strength of the DKK is ongoing and it lies in 7.4324 this morning.
Nordea