Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Jul 09 08 07:25 GMT |

* Fears for US GSEs have been alleviated. The stock markets are up, bond yields are up, and oil is down
* Very light data schedule today

Markets Overnight

It's a rollercoaster market out there and we are still torn between hope and despair. The stock market ended on a bullish note yesterday, and has continued up in Asia this morning, as fears for the fate of the US mortgage giants Freddie Mac and Fannie Mae calmed.

The big issue that triggered the big drop in the GSEs' equity value on Monday was whether or not they would lose their regulatory exemption from bringing on SIVs to their balance sheets and thus be forced to raise new capital. Yesterday the stocks rebounded after regulators stated that they would not have to raise more capital.

Moreover, the drop in oil prices down to 135 USD/barrel certainly helped the stock markets on their way. The S&P 500 ended the day up by 1.7% and the Nasdaq index rose by 2.3%. As we write the Nikkei index has gained 1.8%.

As the financial jitters have receded Treasury yields have risen somewhat. The 2yr Treasury has come back from its sub-2.40% level to 2.50% this morning, and the US yield curve has flattened a bit. On the FX market the EUR/USD came down along with the oil price yesterday afternoon and has stayed relatively stable around 156.6. The rebounding equity market has lent some support to the SEK, and EUR/SEK has come down a bit to 942. The EUR/NOK has remained very stable at 804.
Global Daily

Yesterday proved to be as gloomy as one could fear in terms of new data. US pending home sales continued to drop in every region. The past two days we have heard Fed statements from both the dovish Yellen and the hawkish Lacker. While Lacker has seen signs of improvement in the economy since the beginning of the year and argues in favour of higher rates, Yellen has underlined that she is ready to act if a wage-inflation spiral becomes an issue. Here we must side with Yellen, as we do not see any signs of macro economic or financial improvement in the US.

A notable development is the continued surge in credit tightness in the Federal loan officer survey to new highs. Moreover, the recent turmoil around US mortgage providers has brought up mortgage lending rates substantially. In fact, 30yr mortgage rates are as high as they were a year ago before the credit crisis started, and the 1yr ARM rate is 60bp higher. This should not be overlooked as the stimulus from lowered Fed funds rate should be channelled through lower mortgage and C&I lending rates - something that is obviously not happening as desired. We thus remain bond bullish in our basic outlook.

Today is yet another day with a very light data schedule. There is no market moving data due out in the US or Euroland, but we will see the publication of consumer confidence data and possibly new home price data out of the UK.

Danske Bank
http://www.danskebank.com/danskeresearch