Investment Research — General Market Conditions 05 December 2017 Danske Daily Market movers today Selected readings from Danske Bank The talks about a US tax deal continue to be the main topic in markets. Also, the market will monitor comments on Brexit negotiations after the talk yesterday between the US Labour Market Monitor: Expect strong November report UK’s Theresa May and the EU’s Jean-Claude Juncker did not result in a deal. Flash Comment Denmark: No FX There is no tier-1 data today on the global front but a number of tier-2 data is due to intervention in November be released: PMI services are released for the euro area and the UK and US will release The Big Picture: Global economy the ISM non-manufacturing index. The latter is the most interesting as it reached the still on a roll highest level in more than a decade in the past two months. Although growth is robust in the US, it seems a bit overdone and we could be in for a small decline for November. Follow us on Twitter : Euro retail sales are set to show a decline in October (consensus is -0.7% m/m) after a big increase in September. Overall, the euro consumer is in good shape as signalled by @Danske_Research record high consumer confidence. In Sweden, it is time for industrial orders/production. Also, the Swedish Financial V Video: Arne Lohmann Rasmussen on the Stability Council will host a press conference at 13:30 CET and the Riksbank Governor prospects for the global bond markets Stefan Ingves will give a speech on the risk of a new banking crisis (15:00). In Norway, the Norwegian Regional Network Report and house prices will give more input on the state of the Norwegian economy (for more on Scandies, see page 2). Read more in Danske Bank’s recent Selected market news forecasts and publications China’s Caixin service PMI showed a large increase to 51.9 in November from 51.2 in October, which brought the composite PMI to 51.6 from 51.0. The higher activity in the service thus Nordic Outlook mitigated the slightly slower activity in the manufacturing sector reported last week. In Japan, Yield Forecast Update the service PMI dropped to 51.2 from 53.4 sending the composite PMI down to 52.2 from 53.4. FX Forecast Update Brexit negotiations between the UK’s Theresa May and EU’s Jean-Claude Juncker yesterday Weekly Focus did not end with a deal. However, negotiations will continue this week with the aim of reaching a deal before the EU summit next week and potentially already before the end of this week. EUR/GBP rose on the news as the market had priced in a chance of a breakthrough yesterday. Oil prices dropped yesterday with the price on Brent falling to USD62/bbl. Overnight, it was reported that Saudi Arabia has conducted an airstrike on Yemen – news which is likely to have helped halt the slide in prices. It could further put geopolitical risks back in the spotlight of the oil market this week. According to a Bloomberg survey, OPEC’s crude output dropped in November before the group’s second bi-annual meeting. Coincidently, that brought OPEC’s output down to the lowest level since May when the group first bi-annual meeting to place. The US Supreme Court yesterday announced that US President Trump’s proposed travel ban could take full effect, restricting people from six Muslim countries from entering the US. Thomas Barkin was announced yesterday to take over as President at the Federal Reserve Bank of Richmond from Jeffrey Lacker. It means there is one seat less to be filled on the FOMC (there are still four vacant seats on the Board of Governors and no replacement has been announced Senior Analyst Jens Nærvig Pedersen for New York Fed President Dudley, who will step down next summer). + 45 4512 8061 [email protected] Important disclosures and certifications are contained from page 5 of this report. www.danskeresearch.com Danske Daily Danske Daily Scandi markets In Norway, the regional survey from Norges Bank will be published at 10:00. Despite some housing market weakness, the growth outlook still indicates continued above-trend growth. An aggregated index around 1.10-1.30 should be neutral for Norges Bank based on its September forecast for GDP growth of 0.6 % q/q for the rest of the year. In addition, we are also very interested in firms’ take on capacity constraints as recent reports from the regional network have indicated that capacity utilisation is a bit higher than Norges Bank’s estimates of the output gap would suggest. At 11.00, Eiendom Norge will publish November housing prices. Housing prices pulled a surprise in October, gaining 0.4% m/m after falling for six months solid. The inventory- to-sales ratio has increased to levels indicating a further downward pressure on prices. However, we still consider the downside risks to housing prices to be moderate as affordability is at record low levels, and a turnaround in the market could be just around the corner. Fixed income markets The week started with a reversal of Fridays move in EUR core FI fuelled by US tax reform and the ‘Flynn saga’. 10Y Germany increased 4bp while the yield on Schatz actually decreased back below -70bp again. Interestingly, Italy traded unchanged in outright level implying a tightening to 137 vs Germany – the tightest level this year. The QE figures for November showed monthly German PSPP purchases in line with the previous month (EUR11.5bn). The monthly purchases in November fully reflect the new QE horizon (until end Sep-18) i.e. the November figure suggest that QE purchases in Germany are unlikely to be constrained by the ISIN restriction within the announced QE horizon. The reported Irish net purchases were at an all-time high of EUR1.2bn in November up from EUR-32m in October. Gross purchases (incl. reinvestments) are likely to have been above EUR1bn in both October and November reflecting the combination of reinvestment flows and that the issuer constraint is no longer a constraint. We expect this to be the case in December as well with around EUR1bn in purchases, see QE Details: German purchases suggest no ISIN restriction in 2018, while Irish purchases have doubled in Q4 FX markets In the Scandies, yesterday proved a very calm session. Meanwhile, that will change today as we get the two most important data releases out of Norway within little more than an hour. First, we get the Regional Network Survey which is likely to indicate above-trend growth close to Norges Bank’s (NB) forecast. Meanwhile, details on capacity utilisation could well suggest that NB currently underestimates the output gap, which would be one of several factors arguing for a higher rate path at the meeting on 14 December. Second, house prices due out are likely to confirm that the house price decline has more to go but also that the majority of the house price decline is behind us. Details will be scrutinised for the timing of a potential turnaround. In terms of our overall NOK view, we think a fundamental case for a strategic long NOK position is building and we emphasise that there are important differences between Norway and Sweden. EUR/GBP bounced as the EU and UK failed to reach a complete Brexit deal yesterday. The market was clearly positioned for a breakthrough in Brexit talks, and EUR/GBP could continue higher today as investors digest the disappointment. It remains uncertain whether the last remaining issues can be resolved before the EU summit on 14 December where EU leaders will determine whether negotiations can move to the second phase. We maintain the view that while a deal on the divorce (phase one) is important and necessary in order to proceed negotiations, it is the future relationship and in particular a reassurance that a cliff edge Brexit is avoided that matters more for the Brexit risk premium and the longer-term outlook for GBP. Hence, the case for a lower EUR/GBP in 2018 remains intact, but we still see the cross within the 0.8650-0.90 range in the coming one to two months. 2 | 05 December 2017 www.danskeresearch.com Danske Daily Danske Daily In the market for EUR/USD, the outlook for the EURUSD CCS next year will to a great extent depend on what happens after the current suspension of the US debt ceiling expires on Friday. We are most likely headed for another period of a binding debt ceiling before a solution is found in February-March next year when extraordinary measures run out, in our view. That in turn will contribute to keep the US treasury cash balance low and USD liquidity easy and limit a further widening of the EURUSD CCS in coming months. However, we also note that back in September the 3M suspension surprised the market. 3 | 05 December 2017 www.danskeresearch.com Danske Daily Danske Daily Key figures and events Tuesday, December 5, 2017 Period Danske Bank Consensus Previous - SEK Swedish Financial stability council meets - PLN Polish central bank rate decision % 1.50% 1.50% 1.50% 1:30 JPY Markit PMI services Index Nov 53.4 2:45 CNY Caixin PMI service Index Nov 51.2 4:30 AUD Reserve Bank of Australia rate decision % 1.50% 1.50% 1.50% 8:30 SEK PMI services Index Nov 61.4 9:15 ESP PMI services, preliminary Index Nov 55.5 54.6 9:30 SEK Industrial production s.a.