Today's Key Points
- US equities drop after poor but better-than-feared activity data - negative sentiment weighs on Asian stock markets. Euro drops against other currencies and China manufacturing continues to contract.
- Today: Global PMIs, Fed Senior Loan Officer Opinion Survey, recommendations from the Danish tax commission.
US equities dropped on Friday, capping the worst January ever for the S&P500 index as several companies reported disappointing earnings and preliminary numbers showed that the US economy shrank 3.8% in Q4. The index slid 2.3% to complete a fourth straight weekly drop - its longest streak since July. All industry groups fell with info tech and consumer staples in the lead. The negative sentiment has spilled over to the Asian session where most indices are down; the Nikkei225 has shed 2.0%, Hang Seng has lost 2.8% and the ASX200 is 1.2% lower.
US bond markets have been relatively quiet with the yield on the 2Y note some 5bp lower at 0.90% and the yield on the 10Y note some 3bp lower to 2.82%. Treasury investors are now betting that inflation will acceler-ate: the yield on the 10Y note exceeds the consumer price index by 2.74 percentage points - the most since December 2006.
In FX markets, the EUR has taken a beating against most other currencies overnight and is down 0.85% against USD to 1.2730 and 1.2% against JPY to 114. EUR/GBP, which dropped more than 6% last week, is trading around 0.8850, while EUR/SEK and EUR/NOK both open slightly lower this morning at 10.69 and 8.84, respectively.
China's manufacturing contracted for a sixth consecutive month in January as the country's PMI index showed 42.2 - a rise from 41.2 in December. A reading below 50 reflects contraction. The decline in Japanese vehicle sales accelerated in January; sales slid 27.9% y/y after a drop of 22.3% y/y in December. Australia's house price index dropped 3.3% in Q4 after a rise of 2.8% in Q3
Today focus will be on global PMIs and the Fed Senior Loan Officer Opinion Survey. Moreover, the markets will keep an eye on the stimulus package working its way through the Senate during the week. The details of the revised US financial rescue strategy will apparently not be released before next week. In the equity markets, a continued stream of earnings reports will also set the agenda this week.
At 10:00 the final version manufacturing PMIs in Euroland are due. We expect the release to be a non-event confirming the preliminary numbers. In the UK the PMI numbers (released at 10:30) are expected to surprise modestly on the upside, with a 35.0 reading slightly up from 34.9 in December. Markets will largely await the US manufacturing PMI for January due at 16:00. We look for an increase to 33.5 from a revised 32.9 in De-cember - somewhat above the consensus of 32.5. During the evening, we expect the Fed to release the Senior Loan Officer Opinion Survey, which will offer new information about the recent trend in US lending standards.
The risk for long bond yields remains skewed to the upside today. Firstly, we are more optimistic than consen-sus on the UK and US manufacturing surveys. Moreover, we believe that the markets will continue to test where the Fed's pain threshold is in terms of long bond yields. Finally, the long end of the curve has been de-coupling from general risk appetite lately.
The euro is beginning to beginning to face headwind and is now the worst-performing G10 currency in 2009, excluding pro-cyclical AUD and NZD that are dragged down by sour commodity markets and a negative trend in relative yields. Prospects for the manufacturing sector are still looking grim in Euroland and the inventory situation tells us that the slump in production will not disappear overnight. Accordingly, we think the euro has further to fall against the dollar and expect to see EUR/USD in 1.24 in the next couple of weeks. Looking at technical analysis, the sharp decline in EUR/GBP can continue and the pair now targets 0.86.
The day in Sweden starts off with PMI data, which is already at an all-time low. However, since the market fo-cus will be on ISM later on, we do not expect much movement on the back of Swedish data. On Friday, the Riks-bank finally announced the replacement for Irma Rosenberg in the MPC. Karolina Ekholm from Stockholm Uni-versity will be the new vice governor. She has a strong academic background, especially within international economy, but seems to lack experience in the world of finance.