Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Jul 24 08 08:08 GMT |

Danske Daily Today's Key Points US equities and the US dollar rose for a second day as the House of Representatives voted in favour of a rescue bill for Fannie Mae and Freddie Mac, and the price of oil kept falling Not much changed in the conclusion on the Beige Book, released last night. It was slightly more negative on activity, which supported lower US yields and rates Today we will receive the German ifo, Euroland manufacturing PMI, US jobless claims and US existing home sales. Markets Overnight US equities rose for a second day as the House of Representatives yesterday voted in favour of a bill that gives Treasury Secretary Henry Paulson power to inject capital into Fannie Mae and Fred-die Mac and provides for a Federal agency to insure refinanced home loans. The bill now has to be approved in the US Senate. Equity markets obviously took this as good news, sending Fannie Mae and Freddie Mac up by 12% and 11%, respectively. Bank of America also added to the positive sentiment in the financial sector, as it plans to repurchase up to 75m shares - this lifted its stock price by 3.4%. Further help for US equities arrived yesterday as oil prices kept falling. The first crude oil contract is trading at a seven-week low of around USD 124.3bbl, down 14% from its peak of USD145 bbl on July 14. The almost 4 dollar-a-barrel drop in oil prices boosted 28 out of 29 retailers in the S&P500 index. In sum, S&P500 gained 0.4% to stand at 282 - a three-week high, while Dow Jones added 0.3% and Nasdaq rose 1.0%. The Beige Book released last night portrays a US economy in stagnation and closely resembles the message from the last report. On balance, the impression was slightly more negative on activity; tax rebates boost consumption slightly, no signs of stabilisation in housing, decline in manufacturing activity, mixed service sector and sluggish non-residential construction. Credit conditions continue to tighten, and the demand for credit keeps deteriorating. Price pressures remain high, but there are no signs of spill-over into wages, which continue to moderate. This provided some relief for US bond markets, which had been under pressure for most of the day. Over the night, US bond yields fell across the curve - mostly in the short end, though. 2yr yields are now trading at 2.68% roughly 5bp lower than 24 hours ago, while 10yr yields fell 5bp last night to 4.11%. On FX markets the dollar advanced further against both JPY and EUR, helped by the approval of the bill to support Fannie Mae and Freddie Mac. EUR/USD moved as low as 1.567 last night - now running at 1.57 - while USD/JPY rose to 107.8 last night - the latter cross has been stable over-night. Late last night, the Reserve Bank of New Zealand surprisingly opted for a rate cut of 25bp to 8.0%, a move that weakened the kiwi dollar to its lowest level against the dollar since January 22 - NZD/USD currently trades at 0.742. The positive sentiment carried over to Asian trading this morning. Most Asian stock markets have risen today, and Nikkei225 is up more than 2.1% as we speak. This bodes well for European opening today, which could also be supported by a better-than-expected Q2 earnings report from Credit Suisse Credit, which has just been released. Global Daily Amid the current flow of Q2 earnings reports, focus is likely to turn towards macroeconomic data for a while. Main events today are German ifo and Euroland flash PMI for July, to be released at 10:00. Generally, we are slightly more downbeat than the consensus view on today's Euroland data. German ifo is estimated to decline to 99.2 (vs consensus of 100.1) from 101.3 in June, Euroland manufacturing PMI to 48.1 (vs consensus of 48.8) from 49.2 in June and Euroland service PMI to 48.1 (vs consensus of 48.7) from 49.1 in June. In the US, weekly claims data is due at 14:30 and June existing home sales data at 16:00. We look for a flat reading of 4.99m (consensus 4.94m) in existing home sales. At 16:00, N.Y. Fed Governor Geithner (voter, neutral) will testify before the House Financial Services Committee. Given the announced title of his remarks, he will probably not touch on the economic or monetary policy outlook. Early in the day bond market focus is set to be on the Euroland data releases, which should provide further evidence of the Euroland economy stagnating and should also indicate an increasing risk of a GDP contraction in H2. If the declining trend in global commodities continues, these numbers may well be what the bond markets need for a bullish turnaround. However, so far, increasing appetite for more risky assets has been in the driving seat of bond markets, leaving not only Treasuries, but also long dated Bunds, suffering for most of the week. In FX markets, implied volatilities have generally fallen since the rescue of Bear Stearns in mid-March. Uncertainty about some currency crosses has fallen moderately, while the risk perception associated with others has declined considerably. The 3M implied EUR/USD volatility has remained just below its March high, while the 3M implied EUR/JPY volatility has declined more than four percentage points. In fact, looking three months ahead, EUR/JPY is now perceived to be less volatile than EUR/USD. To benefit from this, investors who believe in long-term valuations suggesting good value in JPY can use the current environment to establish long JPY positions, as there is less risk of being stopped out now that market-implied uncertainty has decreased. The timing may, however, be a little tricky, as there are no obvious drivers calling for an immediate strengthening of JPY. Scandi Daily In Sweden we will receive both producer prices and the labour force survey (incl. unemployment rate) today. As far as producer prices are concerned, we are most curious to see developments in domestic supply prices on consumer goods, which are a precursor to consumer prices. Domestic consumer goods prices have risen quite dramatically lately, indicating strong pipeline pressures on consumer prices. Regarding the labour force survey, our main interest is employment and hours worked rather than the unemployment rate per se. Employment and hours worked have proved resilient to slower growth, which has also served to keep productivity low. It should soon be time for a change of the tide. Will today's data be the turning point? Under any circumstances, we should be careful not to exaggerate the (short-term) influence on the Riksbank executive board, where the majority has made it very clear that it is spot inflation and inflation expectations that decide the future monetary policy path - not the growth or employment outlook. Danske Bank http://www.danskebank.com/danskeresearch Disclaimer This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets' research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.