Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Jul 17 08 07:23 GMT |

Danske Daily US financials rally - Wells Fargo lead tremendous performance. S&P500 up 2.5%. Oil prices drop after unexpected rise in inventories. Crude oil for August delivery now trades at $135 per barrel. Today, US housing data and Philly Fed are most important data releases. Markets Overnight After an almost endless decline, US financial stocks experienced some tailwinds yesterday. A higher-thanestimated profit at Wells Fargo spurred the best day for financials ever, with an 11% increase. Wells Fargo, which avoided most of the fallout from the subprime crisis, had its best day since 1980 as it rallied as much as 33%, chalking up the steepest advance in the S&P500 index. The positive sentiment influenced the entire sector, and all banks saw substantial increases in their equity prices. A lower oil price was the finishing touch, and the broad S&P500 index rebounded from its lowest level since 2005, rising 2.5%. Only energy-related companies suffered and are now down almost 15% on average from their peak two months ago. US crude oil inventories surprised by rising almost 3mn barrels. Since a modest fall had been expected, oil prices dropped sharply immediately afterwards. Crude oil for August delivery is now trading just below $135 per barrel. US treasuries fell as risk appetite returned and the entire bond curve shifted slightly upwards. The yield on the 2Y note ended 7bp up, at 2.42%, while the yield on the 10Y note ended at 3.94%, up 12bp. The minutes of the Fed June 24-25 monetary policy meeting were released yesterday evening. After Bernanke 's semi-annual testimony, not much news was expected. The most interesting piece of information embedded in the minutes, was the increasing evidence of disagreement between the hawks and the doves on the FOMC. In several passages of the text, the disagreement among the members is stated in an exceptionally explicit way, literally portraying a fight between the hawks and the doves on the committee. After the solid US equity performance, one should think that the way was paved for a similar splendid Asian session. But this is only to some extent true. While the Hang Seng index is up 2.5% at the time of writing, the Nikkei225 index has only risen an unpretentious 1%. Reason for the modest increase is probably that data out of China shows that the Chinese economy in Q2 grew at its slowest pace since 2005. The growth of 10.1% is still remarkable, but the declining trend in the growth rate is now evident. China's consumer prices rose 7.1% in June, 0.2pp less than expected. In FX markets, the suddenly bullish equity market and the lower oil price have only had a minor impact. EUR/USD, which tends to be positively correlated with the oil price, has dropped to 158.50 after having touched 160.38 earlier this week. This is, however, a smaller decline than should be expected from the drop in oil prices alone, and even lesser when taking the good US equity performance into account. So either this suggests that other downside risks are keeping the dollar weak or some adjustment in EUR/USD is about to happen. SEK and NOK have regained a little strength overnight after a rough day yesterday, but these currencies seem to be fragile when markets are thin and liquidity is low. The dimmed Chinese export outlook led to the biggest drop in the CNY vs. USD in seven weeks. Global Daily As the weekend approaches, the calendar of events is getting lighter. The focus today will be on housing data out of the US. At 14:30 CET, housing starts and building permits will be published. We are looking for a slightly weaker reading than the consensus. In any case, though, the numbers will confirm the continuing alignment on the supply side of the housing market. Later in the day, at 16:00 CET, the Philadelphia Fed manufacturing index is due out. We expect an improvement to a still suppressed -12 reading in July from -17.1 in June. Although our estimate is slightly more up-beat than the consensus expectation of -15.1, a reading in line with our estimate would probably not cause any major reaction in markets, given the usually high volatility of this index. In FX markets, the Bank of Canada monetary policy report, due at 16:30, could attract some attention late in the day. Finally, note that the minutes of the BoJ's June Monetary Policy Meeting will be published during the night before tomorrow, at 01:50. Generally, we do not believe that the incoming data, by itself, will cause much action in bond markets. Sentiment is likely to be driven by general risk aversion. As such, credit and equity markets are likely to set the tone for bond markets today. So far the big winner in FX markets this week has been the yen. That is no surprise as risk aversion has surged, credit risk has increased and uncertainty in general has risen. In such cases, the yen serves as a nice safe-haven currency and as a hedge against abomination. The curious thing, how-ever, is that the JPY by no means is supported by domestic factors: In fact, BoJ has cut its GDP forecast for 2008 from 1.5% to 1.2% and for 2009 from 1.7% to 1.5%. So if JPY should continue to appreciate vs. major currencies, stock markets should continue to tumble and risk aversion should remain high, as the good news-flow out of Japan is pretty downbeat. Another curiosity in FX markets is the relatively good performance of AUD and NZD despite the marked fall in oil prices. Rea-son for this might be that the central banks of Australia and New Zealand haven't been re-priced as much as other central banks. Combined with the fundamental prospects, this could serve as a nice sell opportunity, especially for NZD, which has the worst outlook. One event to look out for, how-ever, is the RBNZ meeting next week. As some expect the bank to begin cutting rates already and therefore end up disappointed, the NZD can accordingly appreciate a little afterwards. But as the outlook is for lower levels in NZD/USD (down to 0.70), establishing short positions might be wise in the near future. Scandi Daily There is no news out of Scandinavia today. Once again, focus will be on international events. Key drivers will probably be a test of the suddenly bullish equity sentiment, if the lower oil price can be sustained and if risk aversion is on the decline. Danske Bank http://www.danskebank.com/danskeresearch