Market movers today
- Today’s highlight is the ECB monetary policy meeting. It is widely expected that ECB will recalibrate its monetary policy instruments, using both the bond purchase programme and the liquidity instruments (TLTRO). We also expect tweaks of a more technical nature, see ECB Preview: Recalibrating, not easing, 3 December.
- The EU council meeting starts today, where notably the approval of the NGEU (recovery fund) should be confirmed. Yesterday’s media reports suggested that Germany had brokered a solution for the Hungary/Poland versus rest of EU rift. Focus continues to be on the Brexit negotiations as well.
- In the US, the Food & Drug Administration’s advisory board is meeting to discuss the Pfizer vaccine. We expect the Pfizer vaccine to be approved and that vaccinations will start very soon in the US. The EU authorisation is expected no later than 29 December.
The 60 second overview
EU budget rift. Poland and Hungary have agreed to lift the veto on the EU budget following an agreement struck with the current German rotating EU presidency. The deal does not change the ties between pay-outs under the budget and the rule-of-law standards, but sanctions following from breaches cannot be enforced until the European Court of Justice has made an assessment regarding the legality of the new rules. This could cause potential sanctions to be delayed for as much as one year. All is not said and done, however, as both the Council and the Parliament will need to approve the agreement. The EU Council meets today in Brussels and an official announcement regarding the deal is thus to be expected this week.
Brexit. UK Prime Minister Boris Johnson and President of the EU Commission Ursula von der Leyen met yesterday evening in Brussels in a bid to get Brexit negotiations back on track. The negotiations are currently stuck in areas such as fishery as well as retaliation rules regarding fair competition. The meeting did seemingly not lead to a break-through and the two sides have given their respective negotiation teams until Sunday to come up with a compromise. This was agreed at yesterday’s meeting. Even before the meeting hopes of an agreement were fading among EU officials, as it needs to be ready to verify by the Council before the end of this month. Without an agreement the EU and the UK are set to be trading on WTO terms come 1 January.
Equities. Wednesday saw the roles reversed as European markets closed modestly higher and US lower. The drop in US shares was relatively muted (Dow Jones down -0.2%, S&P 500 -0.6%, Nasdaq -1.8% and Russel 2000 -0.8%). Among sectors, Value continued to outperform with Energy, Materials and Industrials the only sectors in green and Communication Services and Tech at the bottom. Without any notable catalyst, Vix took a leg higher, from 20 to 22. Asian markets only see minor movements this morning and US futures indicate a similar opening later this afternoon.
FI. We have seen modest movement in global bond yields ahead of the ECB meeting today. We expect the ECB to expand QE through PEPP as well as extending the TLTROs. Hence, this should be supportive for the ongoing spread tightening we are seeing across EU sovereigns as well as credit markets as reflected in our top trades for 2021, where we look for more spread compression in 2021. See Danske Bank EUR and Scandi Fixed Income Top Trades 2021, 4 December.
FX. Oil currencies like NOK and RUB were among yesterday’s losers with oil coming off highs following an EIA report showing a large US crude oil inventory build. HUF and PLN gained on EU budget news, yet EUR/USD moved below 1.20 before rebounding slightly late in the US session. Finally, EUR/GBP briefly moved below 0.90 and continues to follow Brexit headlines closely.
Credit. Credit markets had a slight widening bias yesterday where iTraxx Xover widened to 242bp (+2bp) and Main was more or less unchanged at 48bp. HY cash bonds widened around 3bp while IG was unchanged.
Nordic macro and markets
We expect Danish CPI inflation to decrease to 0.2% in November, from 0.4% in October. Declining gasoline prices drag down and we expect tobacco prices to increase only slowly from here, as cigarettes have less than 5% to go before full impact from the April tax increase and the turnover of other tobacco seems to make price increases here very slow. Hotel prices were 15% down y/y in October and we expect them to keep weighing down as long as travel restrictions are in place globally.
In Norway, inflation will probably be something of a sideshow once again in November. While the core rate has been somewhat lower than expected over the past couple of months, it is still well above the 2% target. The prospect of a stronger krone and slightly lower wage growth suggests that prices will slow during the course of 2021 and there is little reason for this to have an impact on monetary policy for as long as inflation expectations remain properly grounded. On the other hand, there is little reason to fear inflation falling too far, while capacity utilisation continues to rise.
Swedish November inflation is out and we expect CPIF at 0.0% y/y and CPIF excl. Energy at 1.0% y/y, both -0.1pp below Riksbank’s forecasts. Energy is a neutral factor this month. Airline tickets and charter packages give a negative contribution as usual in November (probably partially imputed), which is partially balanced by higher prices mainly on clothing, food and furniture. Given the backdrop with an appreciating SEK, the risk is tilted to the downside. However, yesterday’s Prospera showed that inflation expectations were stable in the 5y term, hence buying the Riksbank some time (despite today’s expected low inflation figure).
Yesterday the Norwegian Ministry of Finance announced that the mortgage loan regulation will be extended until the end of 2024. The decision comes on the back of the FSA recommending a tightening. As the housing market and household debt growth have picked up significantly this year the decision makes it more likely that Norges Bank will hike rates in December 2021 (our call). What is more, national account figures showed that October mainland GDP levels were only 1.5% below pre-COVID-19 levels. That said, the forthcoming December meeting will likely prove too early for Norges Bank to firm its forward guidance by any significant extent.
