EU Growth Initiatives To Be Presented In June
Danske Markets | May 24, 2012 02:18AM ET
- EU summit focused on growth and Greece. The leaders discussed Eurobonds as well as a common deposit insurance scheme.
- China’s HSBC manufacturing PMI declined to 48.7 in May from 49.3 in April.
- EUR/USD dropped to a two-year low on concerns of a Greek exit.
- Focus today will be on euro area PMIs, German IFO and the first release of US PMIs
h3 Markets Overnight/h3
The EU summit confirmed that growth initiatives will be presented in June but only a few new details were presented. The so-called project bonds appear to be one of the building blocks that will form the growth initiatives. The EU leaders confirmed their support for Greece remaining in the euro. Both Eurobonds and a common deposit insurance scheme were discussed but no consensus has been reached on these issues. France’s Hollande keeps pushing for Eurobonds, while Germany is opposing the proposal at this stage, see full statement from President Van Rompuy.
China’s HSBC manufacturing PMI in May declined to 48.7 from 49.3 in April. Current output improved from 49.3 to 50.5 (the highest level in seven months), while the forward-looking new order component was weak. The release suggests that GDP growth remained stuck below trend in Q1 in the 7%-8% range q/q AR but Chinese growth does not seem to be decelerating markedly. With growth stuck below trend and no signs of improvement, fiscal and monetary policy will be eased more aggressively in the coming months. In a statement overnight the Chinese State Council (government) said that China “must intensify precautionary adjustment and fine tuning of policies,” see Bloomberg. The statement said a series of new infrastructure projects will be started. We now expect another four 50bp cuts in the reserve requirement in the rest of the year but maintain our forecast that interest rate will be left unchanged, although the likelihood of a rate cut is increasing. We expect GDP growth to improve to above trend in H2 12 on the back of more aggressive
policy stimulus.
Risk appetite dropped yesterday on concerns about a Greek exit, after it was reported that eurozone finance ministry officials had held a conference call on Monday where each country was asked to detail their contingency planning, see FT. The negative sentiment from the European trade carried over to the US equities but the S&P500 ended the trade up 0.2% after a minor rally just before closing. The S&P future has decreased slightly in Asian trading. In Asia stock indices are trading in negative territory this morning. Nikkei is down by 0.5%, while Hang Seng is down by 0.6%.
Get The News You Want
In FX markets EUR/USD dropped to a two-year low and is this morning trading around 125.8. Also commodities sold off with Brent crude dropping to below USD106 - the lowest level this year.
Markets will digest the news from the informal EU dinner this evening. In addition, the data calendar is loaded with important releases: Flash PMIs for Euroland and US, German IFO, US durable goods orders and jobless claims data. Data on global growth have been mixed lately and today’s data should provide more clarity on the current strength of the recovery. In the euro area, we expect the manufacturing PMI to increase slightly from its depressed level and the German IFO to decline moderately, thereby narrowing the divergence between the two measures. In the US we will get the first ever release of the Markit flash PMI. The measure should be relatively close to the ISM, although Markit uses different weights on the sub indices to calculate the composite. The primary difference is more weight on new orders and production and less weight on supplier deliveries and inventories.
In addition, ECB President Draghi will speak in the afternoon and later on board member Asmussen, who – in unconfirmed media reports - has been pointed out to be heading an ECB working group on Greece, will give a speech about the ECB’s view on the crisis. This could prove interesting given the increased market speculation about further monetary policy easing from the ECB. In the US, New York Fed President Dudley will speak and any hints about possible QE3 triggers will be key.
Fixed income markets: No improvement of the sentiment after the EU summit and the Chinese data; hence we expect to see continued strong demand for safe-haven bonds, such as US Treasuries and German bonds, in the coming days. Today Denmark plans to issue up to DKK6bn. If the DMO sells the full amount with a bid-to-cover of around 2, the launch of the new 10Y linker will have been a big success. Demand is still expected to come from domestic investors but similar to increased foreign demand for Danish nominal government bonds, we expect foreign investors to gradually become buyers of the Danish index-linked bond, even though it is not yet part of the global inflation-lined bond indices.
FX markets: Risk sentiment seems to get worse and worse at the moment, as concerns about Greece leaving the euro are growing. The market direction is almost one-way traffic and last night the euro dropped to 1.2545 against the dollar, the lowest level in 22 months, before gaining a little. Today a lot of important macroeconomic releases will take centre stage. Unless data surprise significantly to the upside we will continue to see downside for EUR/USD and a test of our 1M forecast for EUR/USD at 1.25 seems imminent.
This morning’s bleak Chinese PMI number adds to the concerns about a hard landing in China and both AUD and NZD together with other commodity-sensitive currencies are likely to get even more headwind today. EUR/DKK has been trading below 7.4325 since Monday morning and the current level is at or close to levels that earlier have triggered intervention. A subsequent rate cut from the Danish central bank could come sooner rather than later if the downward pressure on EUR/DKK continues.
h3 Disclosure/h3
This research report has been prepared by Danske Research, a division of Danske Bank A/S ("Danske Bank").
Analyst certification
Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research an alyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report.
Regulation
Danske Bank is authorized and subject to regulation b y the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request.
The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of th e Danish Securities Dealers Association.
Conflicts of interest
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the research policies of Danske Bank. E mployees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to the Research Management and the Compliance Department. Danske Bank Research Departments are organised independently from and do not report to other business areas within Danske Bank.
Research analysts are remunerated in part based on the over -all profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions.
Financial models and/or methodology used in this research report
Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request.
Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.
Expected updates
Danske Daily is updated on a daily basis.
First date of publication
Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price from the day before publication.
General disclaimer
This research has been prepared by Danske Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a soli citation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ("Relevant Financial Instruments").
The research report has been prepared independently and solely on the basis of publicly available information which Danske Bank considers to be reliable. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness, and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report.
The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgment as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in the research report.
This research report is not intended for retail customers in the United Kingdom or the United States.
This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior written consent.
Disclaimer related to distribution in the United States
This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to "U.S. institutional investors" as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to “U.S. institutional investors.”
Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA, but satisfy the applicable requirements of a non-U.S. jurisdiction.
Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in nonU.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.