Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Nov 06 08 08:22 GMT |

Danske Daily US stock markets suffer from election jitters and concerns regarding a further weakening of the economy. S&P500 declines 5.3%. Asian stocks follow the negative sentiment, and post big losses this morning. Key events: Monetary policy meetings in Euroland, the UK and Denmark. We expect 50bp cuts from the ECB, BoE and Danmarks Nationalbank, but also risk of a rate cut from SNB. Markets Overnight The stock market posted its biggest plunge following a presidential election as reports on jobs and service industries stoked concern the economy will worsen even as President-elect Barack Obama tries to stimulate growth. The report by ADP Employer Services showed companies cut 157,000 jobs in October, the most since November 2002 when the US was emerging from a recession. The S&P 500 tumbled 5.3%, erasing Tuesday's 4.1% rally. The Dow retreated 5.1%, while the Nasdaq dropped 5.5%. Not surprisingly, US Treasuries performed with a decline in yield. Yields on the benchmark 10-year note declined 3bp. Asian stocks declined after News Corp, Cathay Pacific Airways and Isuzu Motors cut their profit forecasts, adding to evidence that the global economy is heading towards a recession. News Corp declined almost 20%, while Cathay lost 12%. The main indices such as Nikkei and Hang Seng have declined 7% and 6.4% this morning. Asian bond markets reacted positively to the decline in equity prices with solid declines in e.g. 10Y government yields. 10Y JGBs have declined by 5bp this morning. In the currency markets the euro is weakening against the dollar as the ECB is expected to cut rates by 50bp, and EUR/USD is trading below the 129 level this morning, after been above the 131 level yesterday. The yen is strengthening against the dollar and is trading below the 98 level. NOK has remained stable against the euro in Asian trading this morning, and is trading just below the 8.80 level. SEK has remained weak against the euro in Asian trade and is again through the 10.0. However, EUR/DKK remains well below the central parity and is trading at 744.3 level this morning. Global Daily Today all eyes will be on the monetary policy announcements from BoE and ECB. Both central banks are expected to cut rates further (on top of the 50bp reductions seen earlier this month in the coordinated action with the Fed and other major central banks). In both areas the economies are close to, if not already in, recession with the growth outlook continuing to deteriorate. Fortunately, the collapse in energy prices over the past few months is now leaving room for monetary policy accommodation. In the UK the rate decision will be announced at 13:00. We look for a 50bp reduction in interest rates, taking the Bank Rate to 4.0%. This is in line with consensus, although some analysts expect a 75bp cut. We expect the BoE to continue easing policy in December and early next year, taking the Bank Rate to 3% in the spring. This is a slightly less aggressive profile than the current market pricing. The ECB rate decision is released at 13:45. Also here we look for a 50bp cut in the interest rate to 3.25%, which is in line with consensus. The market is pricing a total of 125bp in cuts over the coming nine months. While we agree with that the market's profile is more front-loaded with close to 75bp priced for Thursday, and a total easing of 100bp priced by December. Hence we see some risk that the November and December Eonia rates could rise following today's decision. . During the night Asian markets have soured and with US bond yields moving slightly lower since European closing time, this could add some upward pressure on European bonds in the morning. That said, the bond market will probably be in wait-and-see mode until the monetary policy decisions from BoE and ECB are released. Today's central bank meetings will also take centre stage on the FX market. Under normal circumstances, lower interest rates are associated with a depreciating currency in the short to medium term - however, these are not normal times. Markets might interpret a larger-than-expected rate cut from the BoE, i.e. more than 50bp, as a signal of a stronger dedication to address the great economic challenges facing the UK economy, whereas a smaller rate cut could be interpreted as the BoE being reluctant to fuel the economy appropriately. The conclusion must therefore be that a 'small' rate cut - of 50bp - is likely to put the pound further under pressure leading to higher EUR/GBP. When it comes to the ECB, we do not think Trichet will be more pessimistic than the already downbeat growth forecasts from the European Commission released earlier this week. Accordingly, we do not see EUR going significantly weaker, if the ECB cuts rates by 50bp as expected. Finally, we would like to add that, assuming the ECB delivers, investors should be aware of the probability that the Swiss National Bank (SNB) might follow suit and deliver an inter-meeting rate cut. Indeed, the pressure on the SNB to ease monetary policy further has increased lately, while at the same time the SNB has gained more room to manoeuvre, as the three-month LIBOR is finally fixing nearer the SNB target of 2.50%. Scandi Daily A rate cut from the ECB raises an important question: Will Danmarks Nationalbank (DN) follow suit? We think it will: the combination of a strong DKK against EUR, normalised deposit spreads and the fact that the currency reserve remains triple-digit leads us to conclude that no further advantage of holding DKK relative to EUR is required. Accordingly, we expect the DN to announce a rate cut of the same magnitude as the ECB at 16.00 CET. We expect EUR/DKK to be somewhat unaffected, i.e. still to trade well below the central parity. We acknowledge that the probability range is wider than usually; the DN can choose to stay on hold and refer to the fact that the underlying pressure against DKK hasn't disappeared completely (no official statement will however be required for this action); it can cut by less, i.e. widen the policy rate spread, or it can cut by more the ECB - a strong signal that the DN likes to normalise the policy spread as quickly as possible and regard the pressure against DKK as truly past. While we attach positive possibilities to each of these scenarios, none of them are our base-case scenario. 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. 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