Reduced concerns about Greece fuelled yesterday a risk-on move in Europe and the US. German and US government bonds sold off (US 10Y yield up 13 bp), the EUR rebounded and equities rallied (Stoxx 600: +0.8%; S&P 500: +1.4%). EUR/USD rose briefly above 1.15 for the first time since 22 January but is currently trading around 1.1475.
Brent oil prices firmed for the fourth consecutive day to USD 58 per barrel, a level last seen a month ago. The gains appear to be related to growing expectations that the US could be closer to cutting production, spurred by last week’s drop in oil rig counts.
In Asia this morning, the Nikkei (1.9%), Hang Seng (0.9%) and Shanghai Composite (0.3%) are all higher.
Late on Monday Greek Finance Minister Varoufakis outlined plans for a debt swap, replacing the government’s call for a debt write-down. Varoufakis proposed to swap Greek government bonds held by the ECB and the official sector for growth-linked and perpetual bonds (ie. bonds with no maturity date), sparing privately held bonds from losses.
Denmark’s central bank sold DKK for DKK 106.3bn in January to defend the DKK peg to the EUR, a record high. As a result, Danish currency reserves rose to DKK 564.1bn, an all-time high. In a comment Danmarks Nationalbank pledged limitless FX interventions to save the peg. We expect interventions to continue for now. Danish Prime Minister Helle Thorning-Schmidt is “fully confident” the central bank will be able to maintain the DKK peg, she said yesterday. So are we.
In Turkey inflation dropped “only” 0.9% point to 7.2% in January and as a consequence, we will probably not see an emergency rate cut from the CBRT today. However, we expect a cut at the regular MPC meeting on 24 February.
Day ahead
Today Greek Finance Minister Varoufakis will meet ECB President Draghi in Frankfurt.
The most important data releases are the US ADP employment indicator and the US ISM non-manufacturing survey, which will both help shape expectations ahead of Friday’s jobs report. In addition, retail sales and the final services PMI for January are due out of the Euro area.
The consensus estimate is a 220k increase in the January ADP employment indicator, while a modest decline to a still strongly expansionary 56.4 is seen for the ISM non-manufacturing index. In December the ADP indicator was spot on private-sector payrolls growth – a rare bull’s-eye though (see chart below).
In Poland the central bank is expected to keep rates unchanged, but a March cut may be signalled.
Rates
Peripheral yields gaining relative to core. Even though the periphery was the winner, the movements across the curve are worth a comment. Basically all euro government bonds gained in the shorter end of the curve (2-5Y), but moving beyond this point yields from the core and semi-core rose.
The Greek curve is still inverted (indication of default), but after yesterday’s session the picture looks less gloomy. As such the Greek 10Y yield fell almost 140 bp leaving the rate at 9.26%. Ireland managed to sell EUR 4bn in 30Y bonds, showing high demand for peripheral paper.
There is still a lot of focus on the Danish market, but after Monday’s massive rally in yields across the curve, we saw government yields rising. The short end (2Y) rose almost 15 bp, with the rest of the curve rising about 5 bp. Liquidity in the market is still at very low levels.
In the US government bond yields rose across the curve (10Y yield up 13 bp), with US swap rates also rising slightly (0.5-1 bp).
EUR swap rates fell slightly in the short end (0.5-1 bp), but were otherwise unchanged.
FX
The EUR/USD cross rallied further yesterday with no apparent drivers – the market just takes a breather from the exponential USD rally. This was consistent with the positive risk sentiment. Such moves reflect the market positioning – long USD – and further covering of short positions is likely, taking EUR/USD to 1.15 within a week. The SEK, a “high-beta” on the EUR, rose more than 1% against the USD.
The European currencies may pause today, however, should today’s first insights into Friday’s US payrolls report – the ISM and the ADP jobs report – surprise on the upside.
Oil-related commodity currencies were the top performers yesterday, with the RUB and the NOK gaining more than 1%. Not surprising, given the fourth day of oil prices recovering: now Brent is more than 26% from the January lows. The pattern is similar to the previous oil price trends in 2008 and suggests a bottom. The AUD was the biggest loser yesterday, though, after the surprising rate cut from the RBA. We think the markets have overreacted, and the AUD should find support if the oil price rise spills over to metals, notably iron ore.