Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Oct 16 08 07:26 GMT |

Danske Daily US stock markets suffered their heaviest falls since the crash of 1987, and equity markets are also down in Asia overnight - indicating that we are in for a difficult opening on the European markets. Today's data calendar is dominated by US releases, with September CPI at 14:30, industrial production for September at 15:15, business confidence from Philadelphia Fed for October at 16:00, and the NAHB October housing index at 19:00. With economic concerns and risk aversion on the rise, investors will turn to safer assets. Hence, we should be in for a positive opening on the bond markets with lower yields and steeper curves. Markets Overnight Stock prices on Wall Street suffered their heaviest falls since the crash of 1987, and equity markets have continued their free fall in Asia overnight, suggesting that we are in for a difficult opening on the European markets today. Following a sense of relief on the financial markets in the first days of the week, yesterday saw a turnaround in sentiment. US equity markets plummeted, with the S&P500 down more than 9% to 908, and the Dow Jones down close to 8 percent to 8.578. The negative sentiment has carried through to Asia overnight, where the Japanese Nikkei255 is trading down more than 10 percent at the time of writing. While the sum of the latest global government initiatives to deal with the financial crisis is likely to have reduced systemic risks significantly, it still seems unlikely that the G3 economies will escape a recession. The recession risk in the US economy was illustrated by yesterday's retail sales data, which showed a 1.2% drop in September, and the Federal Reserves Beige book on the state of the US economy, which revealed a deteriorating outlook across states. Ben Bernanke, chairman of the Federal Reserve, emphasised the economic risk by stating yesterday that: 'Stabilization of the financial markets is a critical first step, but even if they stabilize, as we hope they will, broader economic recovery will not happen right away'. As equity markets dropped, investors turned to safer assets, sending US Treasuries higher. The yield on 2- year notes fell 26bp to 1.55%, while the yield on 10-year notes stands at 3.95%. Increased global growth scares have also helped push the oil price lower. Crude oil for delivery in November has fallen 5 dollars from Tuesday's close and has traded around USD73 per barrel overnight. On the FX market, volatility also remains high. EUR/USD has traded lower overnight, falling temporarily below 1.34. USD/JPY has fallen to 100, and EUR/CHF is trading around 1.53. Negative market sentiment has meant that the Scandies have continued to weaken, and EUR/SEK is now trading above 10, a historical high, while EUR/NOK has risen above 8.80. Global Daily Yesterday's bad US retail sales report boosted recession concerns in the markets. Aside from the situation in money and credit markets (which should continue to gradually improve), attention today will turn towards incoming activity data and Q3 earnings reports. Today's data calendar is dominated by US releases. September's CPI is due at 14:30. We look for a below consensus reading of 0.0% m/m (5.0% y/y) on the headline, while our estimate on the core is in line with consensus at a 0.2% m/m (2.5% y/y). However, given the cyclical situation, markets will be more interested in the activity data released later in the day. Industrial production for September at 15:15 and business confidence from Philadelphia Fed for October at 16:00 are likely to confirm that the manufacturing sector is contracting. At 19:00 the October housing market index from NAHB is expected to show no improvement by moving sideways close to its all-time low. A couple of Fed speeches from St. Louis Fed Governor Bullard (neutral, non-voter) at 15:30 and Minneapolis Fed Governor Stern (hawk, voter) at 18:00 could turn interesting in the afternoon. The flow of Q3 earnings reports continues. Today we will receive reports from Nokia (12:00), Bank of New York (12:30), Citigroup (13:00), Google and IBM. Given the very negative sentiment that has developed overnight, European stock markets should start the day lower. With economic concerns and risk aversion on the rise, investors will turn to safe-haven assets. Hence, we should be in for a positive opening in the European bond markets with lower yields and steeper curves Scandi Daily In Sweden today we receive highly interesting labour market data. Notices of lay-offs have been on the rise since April, which with normal lags should start to feed through in the form of rising unemployment rates about now. Our estimate is consequently a tad above what the seasonal patterns suggest, though recent labour market indicators actually imply an even higher outcome. Nonetheless, financial market focus continues to be strongly on 'crisis-indicators' such as spreads and volatility measures, which is why we do not expect much of an impact from today's numbers. A weak number could, however, have a strong influence on next week's monetary policy meeting at the Riksbank. As widely expected, Norges Bank yesterday cut its policy rate by 50bp to 5.25%. Norges Bank put all its focus on the financial crisis, while the current high rate of inflation received almost no attention. With regards to the financial crisis, Norges Bank said that, 'The most robust approach may therefore now be to implement measures to reduce the uncertainty and stave off particularly adverse outcomes for the economy. This implies a more active monetary policy than normal, both in interest rate setting and through liquidity policy measures.' This implies that Norges Bank is now going to be more front-loaded in cutting rates than most analysts had expected prior to the meeting, but not very different from the pricing in e.g. the NOK FRA market as of today. Norges Bank's focus away from inflation is evident in its statement 'Inflation remains high, but the forces that have fuelled inflation have now diminished.' It is still an open question as to whether Norges Bank will cut rates again in two weeks' time at the ordinary monetary policy meeting on October 29. We guess it will depend on how the NIBOR fixings develop going forward, the global risk picture and the strength of the currency. If NIBOR rates continue to drop in line with the USD LIBOR, Norges Bank is expected to keep rates unchanged at this meeting and just present a monetary policy report that outlines the rate path for the next strategy period. Hence, we still expect the next rate cut in December, although October is certainly also an option. There is little doubt that Norges Bank will present a quite dovish Monetary Policy Report in two weeks, and the market might very well prepare itself for a new rate cut in two weeks. Further, with oil prices under pressure we would not be surprised to see new highs in EUR/NOK today. In the Norwegian government bond market, the situation is still chaotic after the announcement by Norges Bank to flood the market with government bonds. Hence, expect very wide bid/offer spreads in the government bond market. Danske Bank http://www.danskebank.com/danskeresearch Disclaimer This publication has been prepared by Danske Markets for information purposes only. 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