Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Sep 05 08 08:21 GMT |
Danske Daily

* Stock market and bond yields sharply lower on continued concern about the health of the financial sector and global growth. EUR has weakened further overnight
* Main focus today is the US employment report. Thin calendar in Europe today with only German industrial production likely to catch attention

Markets Overnight

Sentiment on stock markets globally has been very negative overnight on the back of concern about global growth and the health of the financial sector as well as a continued correction in crude oil and commodity prices. In the US, stock indices S&P500 and Nasdaq plunged 3.0% and 3.2% with financial stocks being hit especially hard. There has been no respite in Asia. This morning the Nikkei index is down 2.9% and Hong Kong's Hang Seng is down 2.8%.

Consequently government bond yields are markedly lower. Since European market close 2Y and 10Y US government bond yields are down by 8bp and 6bp to 2.16% and 3.66% respectively.

EUR has weakened further overnight after remarks from Luxembourg's premier minister Junker about EUR being 'overvalued', a slightly softer ECB and as ECB's tightening of collateral standards put pressure on EUR.

This morning EUR/USD is trading at 1.427. With deleveraging back in focus JPY has benefitted. This morning USD/JPY is trading at 106.8 and EUR/JPY at 152.3. Scandinavian currencies have weakened slightly overnight, but overall there has been no major impact from Riksbanken's interest rate decision yesterday.

EUR/SEK is currently trading at 9.483. Since European market close EUR/NOK is largely unchanged at 7.989. Crude oil prices have been stable overnight after dropping yesterday. The Nymex October crude oil future is trading at 108.0 USD this morning.
Global Daily

In Europe the calendar is relatively thin this morning. Only data which should be able to catch some attention in the European markets is the German industrial production data for July released at 09:00CET. We expect the release to confirm that German industry is cooling fast with a decline of -0.5 m/m, which would be in line with consensus. Speeches by ECB's Trichet, Stark and Bini Smaghi at 08:50CET could prove an interesting followup on yesterday's monetary policy meeting.

Today's most important event is the US employment report for August. We expect the US job market to continue to shed jobs with a non-farm payrolls reading at -90K (consensus -75K). This time around there is large uncertainty about the state of the labour market because the weekly claims data has been distorted for a while by the unemployment benefit extensions. As claims data have failed to reverse in recent weeks, we think that some of the weakness in claims data ascribed to this extension might be real. Put differently, we fell that the risk to our estimate is slightly to the downside. Unemployment for August is expected to remain unchanged at 5.7%, but still on an upward trend.

Today bond markets are likely to focus on the US employment report. Although European bond markets have been range trading for a while, the poor sentiment in US and Asian equity markets and yesterday's solid drop in US bond yields might carry over to Europe in the morning with a chance of bond yields opening lower.

In US the bullish trend in bond markets seems to continue, with both 2yr and 10yr declining significantly yesterday. We prefer to stay on this trend today and remain biased for lower bond yields going into the non-farm release. Tonight at 21:55 CET a speech from San Francisco Governor Yellen (dove, non-voter) on the US economy should attract some attention.

With German industrial production expected to confirm the weak state of the manufacturing sector, as signalled by recent order data, and a small negative surprise in US non-farm payrolls on the cards, we see little overall directional guidance for EUR/USD in today's key data releases. The fundamental case for a downward trend in EUR/USD is still present, but the recent move below 1.45 has been rapid and is likely to have increased the short term risk of a technical correction higher. We then feel more comfortable with yesterday's fall in EUR/CHF below 1.60, which has taken the cross back at levels more in line with our short-term financial models.
Scandi Daily

Thin calendar in Scandinavia today. In Norway, July industrial production will be released. We expect a slight increase in manufacturing production in July.

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

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