Spanish PM Rajoy deadline set to Catalan President Puigdemont expires today to clarify the independence stance. UK PM May is also in Brussels for the emergency meeting to break the deadlock on the Brexit negotiations. These are the possible primary 16 October key market movers.
16 October, Danske Bank – Will EU commission Jean Claude and UK PM May make progress today on Brexit negotiations? Later this week the Chinese Communist Party congress commences, with President Xi Jinping opening speech on Wednesday 18 October. Markets will also focus on the ECB, FED and BoE this week on policy direction for 2018.
Danske Bank Research: 16 October Key Market Movers
- In Spain, Last week, Catalonian President Carles Puigdement stopped short of making a formal declaration of independence. PM Rajoy responded by setting a deadline (expires today) to the Catalonian President to clarify his stance on the independence declaration.
- Economic data, only second level data releases today, with key focus on US Empire manufacturing PMI.
- In Europe, UK PM May is in Brussels having Emergency meeting to break the deadlock on the Brexit negotiations.
- In USA, Danske Bank Research view is supported by FED’s Yellen comments that the FED is hiking in December, even though another lower than expected US CPI inflation data. The key view is that strong growth will tighten the labour market resulting in a push in wage growth and hence inflation.
- In Austria, People Party led by Kurtz set to take power as overall strong result for the right wing parties.
- In Germany, Unexpected local election win for the SPD in Lower Saxony, prior to the current government coalition talks this week. Some view this as another sign of decline in Merkel’s popularity.
Key 16 October Market News
Catalan President Puigdemont Speech
PM Mariano Rajoy responded by setting a deadline (expires today) to the Catalonian President to clarify his stance on the independence declaration.
There are no Scandi movers today
Fixed income markets outlook
From the market’s view, the Spain -Catlonia crisis has peaked for the time being, with recovery seen in SPGB’s and strength in the Spanish Tesoro. Details announced on this week’s tap including the 30Y, plus 21s, 25s, and 27s.
QE extension will be a “lower for longer” one and Draghi mentioned that Praet had said it well. In summary, The ECB has pre-announced the bulk of the ECB’s decision and a 50% reduction in the QE purchases to 30bn is the market expectation. Additionally, ECB is expected to quantify the QE redemptions.
In Portugal, the government announced over the weekend that it aims to reduce its budget deficit to 1% of GDP in 2018 from 1.4% in 2017. Also debt ratio expected to decrease to 123.5% of GDP for 2018 from 126.2% in 2017. Portugal is viewed as a top performer in 2017.
Awaiting central banks (ECB, BoC, Riksbank and Norge Bank) decisions next week.
16 October Forex markets Overview
EURUSD supported last week by weaker than expected US-CPI data, a drop back on 5-10Y inflation expectations in Michigan consumer survey plus news and comments on the ECB exit strategy. Trading likely pick up on 18 October with various FED and ECB members are due to speak. Danske Bank Research expects trading around the current levels ahead of the ECB meeting on 26th October
Expect EURGBP to remain volatile within the 0.8850-0.90 range, with several key events for GBP this week. The September CPI figures out on 17 October and labour market report on 18 October. Also BoE’s Carney, Ramsden and Tenreyro testify on Tuesday 17 October before the UK Treasury Committee.
Phase 1 of the Brexit negotiations unlikely to be concluded before Phase 2 negotiations can begin. Expect BoE to increase interest rates in November 2017. From risk/reward perspective bias in selling EURGBP if the cross bounces above 0.8970 for a downside move going into the 2 November BOE meeting. In FX options, we see value in a bearish seagull with expiry prior to the BoE meeting.
EURDKK continues to trade around the 7.4440 helped by the lower DKK rates and EURDKK FX forwards. Forecast EURDKK to trade at 7.4450 on 6-12M due to a spillover from a higher EURUSD. Downside risk to the Danske Bank Research from the Italian elections set on 20 May 2018.
This research report “16 October Key Market Movers” has been prepared by Danske Bank A/S (‘Danske Bank’). The author of the research report is detailed on the front page.
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