The stock markets ended slightly higher on Friday (S&P 500 up 0.61%), and the Asian markets followed suit tonight. The EURUSD moved higher on expectation of agreement on Friday, and stayed higher upon the announcement, maintaining the Friday highs this morning. The UST 10Y yield moved 6bps up, to 2.11%, at the end of the session.
Greece and the Eurogroup reached a preliminary last minute agreement on Friday that extends the bailout with another four months. A first list of measures suggested by Athens will be presented later today, and thereafter reviewed by the institutions known as the “troika”. If the measures would not be considered a “valid starting point”, another meeting of finance ministers will be held on Tuesday. However, it does appear as if the Greek stance has softened and we believe that the near-term risk of a Grexit has receded.
On Friday, Euro-area PMIs clearly signalled improved growth perspectives. The higher readings in the service sector indicate stronger domestic demand. France for once surprised on the upside.
Week ahead
The Ifo index today (10.00 CET) should provide more evidence of stronger growth in Germany and the Euro area. An increase would also prove that German corporates are not too worried about the Greek situation.
Tomorrow the focus will shift to the Fed with Janet Yellen presenting her semi-annual monetary policy testimony to Congress. We expect her to repeat that the Fed will be “patient” before raising rates and look for the first rate hike in September. Plenty of data also from the US this week, including the CPI on Thursday.
In the Nordics, the Riksbank’s minutes on Wednesday will shed some light on the reaction function that has changed again recently with a new focus on lifting inflation expectations quickly. Sweden will publish Q4 GDP on Friday.
Rates
The German 10-year Bund yield moved lower on Friday after news flashes suggested that the ECB was preparing for a Greek exit from the Euro zone, only to reverse the drop and finish at 0.37% at the end of the day. The Greek 10-year bond yield closed last week just below 10%.
In the US rates followed developments in Europe and moved lower in the early hours of trading, and reversed at the end of the session. Markets may be particularly attentive to the inflation data and Yellen’s semi-annual testimony this week after the FOMC minutes were interpreted as dovish. The US 10-year Treasury yield is trading around decade wides vs its German peer.
After the market closed on Friday, the Riksbank announced details of the first reversed auction. On Thursday 26 February, the Riksbank will buy SEK 3bn in SGB 1047 (maturity Dec 2020). This is the only one of the four bonds that the Riksbank has announced it can purchase that yields positive and it is also the current 5Y benchmark bond.
FX
The EUR/USD weakened early Friday despite the stronger composite PMI reading as the jitters concerning Greece and rumours of Grexit, predominated the sentiment. But late in the date expectation of the positive outcome made the EURUSD U-turn. This week’s Humphrey-Hawkins testimony is of key interest to the USD – following last week’s relatively dovish FOMC minutes, a more positive tone from Yellen could help the USD short term.
SEK is still struggling as the Riksbank’s easing expectations linger. The Riksbank’s minutes do matter for the SEK this week – any indications of the lower bound being lower or other easing tools would hurt. That said, sentiment is quite extreme and the market is positioned for more (December 2015 RIBA futures rate at -0.18% vs Riksbank rate at -0.10%), and thus the risks of a downward move are high.
NOK again tracked the Brent oil price on Friday and will remain mostly an oil play this week. The unemployment rate and retail sales reported this week should not matter much. While a small miss on retail sales is likely, the overall picture, looking at house prices, is favourable and should thus prevent Norges Bank from easing, which the market expects. The EUR/NOK found support at 8.53 last week, below which the next target is 8.46 (200-day moving average).
EUR/DKK spiked towards the central parity on Friday after Nationalbanken commented that it is ready to use capital controls, if needed, to defend the peg. It is questionable, as the comment came from the head of the Economic Council, which advises the Danish government, rather than from the central bank itself. That said, Nationalbanken will keep doing what it has to do to defend the DKK peg for now.
Nordea