Greek markets continued to take a beating, while it was not a happy day in equity markets in general either. The Stoxx 600 fell by 1.22%, Greek equities by more than 3%, while in the US S&P 500 lost 1.34%. EUR/USD continued to rebound, rising above 1.13. EUR/CHF, in turn, rose to its highest since the central bank removed its floor on the cross two weeks ago.
Disappointing corporate earnings reports weighed on the equity markets yesterday, but it was not all dark. Apple reported a massive USD 18bn quarterly profit, up 38% y/y, clearly above expectations and the biggest quarterly net income of any public company in history, according to Financial Times.
US durable goods orders showed a fourth straight decline in December. Although these data tend to be very volatile, this is bad news, suggesting that the US economy lost momentum in late 2014, potentially partly due to the stronger USD. Luckily, not all US data disappointed. Consumer confidence by Conference Board surged from 93.1 to 102.9, the best reading since 2007 and pointing to strong consumption growth. New home sales, in turn, jumped by 11.6% m/m in December to their best level since 2008.
UK GDP rose a bit more weakly than expected in Q4 (0.5% q/q). With inflation below target, we don’t expect the BoE to hike rates until Q4 2015.
There was speculation about the Swiss National Bank intervening to weaken the CHF. That makes sense in our view, as the CHF remains strongly overvalued. According to the SNB’s vice-chairman Danthine, Singapore’s currency regime (a peg to a basket of currencies) “deserves closer consideration.” He also mentioned Sweden and Norway as examples of economies doing well with a flexible exchange rate.
The EU is planning new potential sanctions on Russia amidst more tensions in eastern Ukraine. However, a potential obstacle to placing new sanctions is the stance of the new Greek government, as unanimity among member countries is needed. The issue illustratesdiscussions with Greece are far from being only about the Greek bailout terms.
Day ahead
We expect the Fed to indicate that it remains on track to start raising rates around mid-year. Thus, we expect no major changes to the FOMC statement at today’s meeting. Both falling oil prices and the ECB’s decision to undertake QE strengthen rather than weaken the case for lift-off in Fed rates later this year, in our view.
Also on today’s agenda: consumer confidence from Germany and France as well as unemployment data from Norway.
Rates
German yields moved slightly downwards yesterday, with the 10-year yield hovering in a narrow range around 38 bp (down around 1 bp for the day) and a slight decrease in the 10-year swap spread. Still, the spread is about 15 bp higher than in November, around the time QE gradually became a consensus expectation.
Short rates and fixings in the Euro area have stabilised a bit lately after a period of very stark drops on the back of the SNB cap being dropped and the ECB announcing its QE. 3-month Euribor was up marginally yesterday and lies at 5.5 bp now. Eonia swaps are on average also higher than late last week, with the market realising that liquidity will come through QE, but it’s not arriving on the very short horizon.
The poor durable goods numbers from the US caused a reasonable rally in the short end of the US market, but rates rebounded later. The daily changes in Treasury yields ended up being marginal. A message from the Fed that it remains on course to tighten policy would openmore room on the upside for Treasury yields.
Germany will tap its 2.5% 2046 bond for EUR 2bn today. The price action here will be interesting as the ECB announced that it would buy between 2- and 30-year maturities last Thursday, and this bond will thus have a slightly longer than 30-year maturity. In the US, USD 15bn of 2-year floating-rate notes will be offered, as well as USD 26bn of 2-year notes.
FX
The EUR/USD continued the climb yesterday, as expected, in a usual “buy on rumor, sell on fact” manner after the ECB meeting. On top of that, it got support from some negative data surprises from the US. However, bad news from the US is not sustainable support for EUR/USD: should it raise risk aversion, the USD could eventually gain. We still hope for Fed hikes and that a positive message from the FOMC tonight could confirm this. Yet that is consensus, so not sufficient to lift the USD: EUR/USD could go further up towards 1.15.
SEK benefited yesterday, getting an extra boost after the disappointing US data, but the NOK fared somewhat worse. Prospects of more easing (ECB) or less/later tightening should support both NOK and SEK, at least short term.
The GBP was trading weaker against the USD after a bit disappointing UK GDP report, but the subsequent rebound suggests the old news does not matter. Since it does not change our assessment of the BoE rate hike prospects, the GBP should keep being supported versus the USD, but not versus the lately more badly hit European counterparts – EUR, SEK, NOK …
Nordea