Market movers today
The week kicks off in a quiet fashion as the US banks are closed for Martin Luther King’s Day celebration. The World Economic Forum’s annual meeting starts in Davos today, and over the week, we will hear a bunch of interesting speeches.
Overnight, we will get Q4 GDP figures from China alongside December retail sales and industrial production data. GDP is expected to have dropped 1% q/q due to the negative lockdown effects in November and Covid surge in December. December activity data is also likely to look very weak but this negative news should be followed by a faster-than-expected rebound in February-March.
On the central bank front, we have the Bank of Japan meeting on Wednesday and Norges Bank on Thursday.
In Europe, key events will be the ZEW index from Germany on Tuesday and the release of ECB minutes on Thursday.
In the US, focus is on last minute Fed commentary ahead of the quiet period starting on Saturday. The most important data release will be December retail sales on Wednesday.
The 60 second overview
Risk sentiment: The week kicks off with risk on with stock market in Asia in green, European futures higher and USD edging lower. EUR/USD again broke the 1.085 level. Trading should be quieter than normal due to a bank holiday in the US.
Updated FX forecasts: Since our last FX forecast update in mid-December, European equities have strongly benefited from diminishing energy concerns, China reopening as well as a general outperformance of cyclical assets vs defensives. Inflation data has generally surprised to the downside and most central banks have slowed their hiking pace. Meanwhile, Bank of Japan increased its yield curve control target band in December with markets now pricing the first hike this summer. Industrial metals have surged to new near-term highs with China set for an earlier than expected reopening.
In this context, USD weakness has extended into 2023, and our topside risk scenario to EUR/USD has played out. Near-term we acknowledge the risk of this continuing, but further ahead we believe too much positivity is priced into the EUR and that markets underestimate the re-tightening potential of financial conditions. We thus keep our downward trajectory on EUR/USD, forecasting 1.03 in 12M. A key assumption behind our FX forecasts is that of a stronger USD and tightening of global financial conditions. Risks to this assumption primarily lies in Fed delivering an actual policy pivot – possibly due to inflation pressures fading fast, a global capex uptick and/or industrial production increasing strongly.
Japan: Ahead of the BoJ meeting on Wednesday, Japan’s 10-year yield has risen above BoJ’s cap for the second consecutive day while the yen has strengthened to levels last seen in May. In its previous meeting in December, the central bank expanded its target band for the 10-year bond yield to between plus and minus 50bp. Despite some speculations, consensus expects no changes in monetary policy this week, but even if the BoJ was to surprise the market, we think market reactions this time would be more muted.
Russia-Ukraine: Russia and Belarus will start joint military drills today lasting until 1 February, which has raised alarm in Kyiv that Russia could be planning a new offensive against the capital city. Heavy fighting in the battlefield is currently focused around two cities in the country’s east, in Soledar and Bakhmut, but on Saturday, Russia fired two waves of missiles across the country.
FI: We are again looking forward to a very busy week in terms of issuance as we have plenty of regular tap auctions from both European sovereign issuers as well as the Scandinavian countries. Furthermore, there are limited redemptions and coupons so the net cash flow remains very negative.
FX: USD continues to weaken, notably against both EUR and JPY, whereas Scandies are supported. This morning we released our updated FX forecasts. In short, we keep our downward trajectory for EUR/USD now targeting 1.03 in 12M, although acknowledging the risk that the EUR-rally could continue short-term. We remain bearish on the SEK, but see potential for a near-term correction lower in EUR/SEK. As for the NOK, we believe 2023 will prove a fruitful year.
Credit: Following an otherwise strong week, CDS indices were slightly soft on Friday where iTraxx Xover widened 6.4bp and Main 1.6bp. Cash bonds held up better with HY bonds tightening 10bp and IG 2bp after having underperformed CDS indices during the first part of the week.
