Greek and Russian markets were under pressure yesterday, following the Greek elections and a Russian downgrade. EUR/RUB jumped from close to 70 to almost touch 78, before falling back to below 77. German and US yields rose, while EUR/USD rebounded a bit. Greek equities tumbled by more than 3%, with bank equities seeing double-digit losses, but European equities in general closed in the black (Stoxx 600 up by 0.56%).
The rating agency Standard & Poor’s downgraded Russia to junk, more specifically to BB+ with a negative outlook. The agency reasoned Russia’s monetary policy flexibility had become more limited and its economic growth prospects had weakened. Even though the move was not a big surprise, it still increased pressure on Russia, following suggestions that yet another round of sanctions could be in store. S&P was the first of the three major rating agencies to downgrade Russia to below investment grade, but Moody’s and Fitch are likely to follow in the coming months.
Greek election winner Syriza agreed yesterday to form a coalition government with the right-wing Independent Greeks party. The Independent Greeks are far from a perfect ideological partner for Syriza, but they are both anti-austerity parties and support the re-negotiation of the programme terms with the Troika. The ensuing negotiations between Greece and the Troika will be tough, but we still believe they will end with a compromise (no Grexit, no formal haircut). But it could take a while.
The Ifo index rose for the third month in a row in January, supporting our view that the German economy is set to pick up momentum.
Day ahead
Today, we will get several second-tier data releases from the US: durable goods orders, Case-Shiller house prices, composite and services PMIs, new home sales and consumer confidence. The most important one is probably the durable goods orders, which recently have signaled some weakening in capex. The data are volatile, but we expect a rebound in December.
We forecast that UK GDP rose 0.7% in Q4, equivalent to 2.9% y/y. The consensus forecast is 0.6% q/q. An outcome in line with these forecasts would support our view that the UK economy will have an upbeat 2015 and that BoE interest rates may start rising sooner than many people think.
The Hungarian central bank is widely expected to keep rates unchanged at today’s meeting.
Rates
Greek markets felt pressure yesterday following the election results, but there were no major spillover effects to other markets. The Greek 10-year yield jumped by more than 60 bp, but at around 9% it remains well below the levels of close to 11% seen a couple of weeks ago. For instance Italian and Portuguese bonds actually saw their spreads contract clearly vs Germany.
German yields finally showed some signs of stabilising after their huge downward move over the past months. The 10-year yield ended the day up by 3 bp, while the 5-year sector saw an even bigger advance. A hawkish Fed tomorrow certainly has the potential to contribute to a further rise in yields.
US Treasury yields rose along the curve as well. The 10-year yield climbed by 3 bp. The snowstorms on the US East Coast can affect trading conditions today and have already led to e.g. the postponement of the US Treasury auctions originally scheduled for today.
In today’s bond supply, the Netherlands will re-open its 30-year benchmark for EUR 1bn to EUR 2bn, while Italy will offer 2-year zero-coupon bonds and inflation linkers for up to a combined EUR 4bn.
FX
The EUR has behaved as the USD after the Fed QE: post-announcement bounce yesterday even despite the Greek election outcome. It may continue for some days, bringing EUR/USD above 1.15. Now that the ECB is done, the focus shifts to the US and the Fed. Today, the US new durable goods orders release, if anything, is an important bit of information – a disappointment could add to worries that the Fed might delay the first hike.
SEK: While the markets are still speculating about whether the Riksbank might mirror the ECB, we consider it unlikely at this point, given the strong positive signals from leading indicators. Thus, so far there is nothing to stop the SEK from gaining. Any short-term hiccups should be utilised to position for strength.
NOK: The ECB QE effect coupled with no big news has resulted in gradually declining NOK market volatility since December, which could generate some investor willingness to be long NOK broadly.
GBP: The British pound had a positive day too against the USD, in line with other European counterparts. If we are right and today’s GDP is reported at slightly stronger levels, the market would question the recent pessimism surrounding the BoE. We still expect the first hike this year, against the markets’ call for mid-2016. That said, the EUR is even more oversold, so any recovery for the GBP would probably happen against the USD rather than the EUR, SEK, NOK …
Nordea