Positive Sentiment After Release of Upbeat Global Manufacturing Data

Key news
It has been a fairly calm night with positive sentiment after the release of upbeat global manufacturing data yesterday.

In the Asian session several  trades on the Nikkei stock exchange were temporarily suspended due to technical problems.

Today we have no key data out of Europe. US initial jobless claims are expected to decline slightly to 370k from 377k the previous week.

Markets Overnight

It has been a fairly calm night with positive sentiment after the release of upbeat global manufacturing  data yesterday. German Chancellor Angela Merkel has arrived in China for a three-day visit to speak with top leaders in order to boost their confidence in Europe and advance strategic partnership. Last night she indicated that she thinks rating agencies are playing too big a role.

Yesterday IIF said that private creditors are close to finalising an agreement with Greece and negotiations  are expected to be concluded  next week.  Other sources indicate that there will be an announcement on both the PSI and a second rescue package from the EU and IMF next week.

US equity markets had an upbeat session led by gains in industrial shares and financials following the increase in ISM manufacturing new orders yesterday. S&P 500 ended the session up 0.89%, while Nasdaq closed up more than one percent.  Shares in the New York Stock Exchange fell after the European Commission blocked NYSE’s merger with Deutsche Börse.  In the Asian session  several  trades on the Nikkei stock exchange (including Sony)  were temporarily  suspended due to technical (server) problems. The Nikkei index  ended up 0.72%, while the Hang Seng index is up almost one and a half percent.

US 10-year bond yields increased slightly and the yield curve steepened a bit as short end yields declined moderately in a calm session.  IBM and Proctor & Gamble issued bonds with the lowest yields ever for US corporate bonds in a sign that some investors are willing to accept very low yields in return for safety.

The FX markets saw EUR/USD fall back slightly to around 1.3170 after it strengthening to levels above 1.32 yesterday as risk appetite increased. EUR/CHF has moved a bit away from the 1.20 threshold, while the yen has strengthened a bit overnight reversing the weakening late yesterday afternoon.  AUD/USD reached a five-month high in a sign of increasing risk appetite. Scandinavian currencies also strengthened slightly overnight.

CAD/USD is trading below parity at a 3-month low.

Global Daily

Focus today: Fairly quiet day on the data front today with no key movers in Europe. US initial jobless claims are expected to decline slightly to 370k from 377k the previous week. This would keep the downward  trend  intact (4-week moving average currently 377k). Fed chairman Ben Bernanke will testify before the House Budget Committee on the state of the US economy at 16.00 CET. We are unlikely to get much new information though, as the Fed press conference last week already revealed how Fed  views the economy at the moment. Negotiations on Greek PSI are drawing to an end and should also be watched closely, although a deal will probably not be announced until next week.

Fixed income markets:  Following stronger demand for core bonds after the Fitch downgrade spree and month-end extension flows, a relatively solid ISM reading yesterday gave way for a minor sell-off in the longer end of the curve. That said, yields remain very low and are neither reflecting the improvement in global macro data nor the decline in market stress. We continue to see value in higher long bond yields and steeper curves in the US, Germany and Denmark. The flow of data and events today should not be breathtaking and focus is more likely to stay on the news flow regarding the Greek PSI. Meanwhile, France is supplying the market with ’18, ’20 and ’22 OAT bonds. The French bond market has  been stable the past weeks and we expect the auction to be relatively well received. 

FX markets: Commodity currencies and emerging market currencies continue to march ahead We still see value in growth-sensitive currencies, but the latest rally has been impressive and yesterday we decided to take profit on our short GBP/PLN position and take half the profit on our carry basket, see FX Top Trades Update (1 February 2012).

These trades were initially published in FX Top Trades 2012 (14 December 2011). This morning we will publish FX Market Update where we will take a closer look at the outlook for CZK/PLN. In general our Market Update models and indicators imply that the risk-rally in FX markets might have happened a bit too fast, which underlines that the risk of a correction is growing.

Scandi Daily

Denmark:  Danish foreign exchange reserves at end January  will be released at 16.00 CET. Consensus expects a DKK 8.3bn increase to DKK490bn.

Norway: The unemployment rate is expected to climb from low levels.