Weekly Focus: European debt crisis goes global

Market Movers ahead

• With increasing spill over from the European debt crisis to global markets focus next week will mainly be on policy makers’ ability to contain the current crisis.

• Hard economic data will most likely be of secondary importance next week.

• In Euroland we expect GDP to have returned to growth in Q1 despite the negative impact from bad weather.

• Light calendar in the US next week. Main focus will be on retail sales.

• In Norway we do not expect major changes in government’s revised budget for 2010 due next week.

Global Update

• The announcement of a relief package for Greece has so far not been able to contain the European debt crisis.

• In Europe attention is now also on other PIIGS countries and there are increasing signs of stress within the financial sector and outside Europe.

• ECB suspends collateral rule for Greece, but at its monetary meeting it did not suggest it was ready for extraordinary steps to calm the markets.

• Bank of Japan provides emergency liquidity in the wake of a stronger JPY and revaluation of CNY might be postponed.

• Hung parliament in UK weighs on GBP.

Market movers ahead

Global

• In the US the retail sales report for April is likely to show a setback in total retail turnover of 0.6% m/m. The decline in the headline is likely to mask a small increase in retail sales ex. autos, building materials and gas of 0.2% m/m vs. 0.7% m/m. Further, the NFIB small business survey for April will provide fresh evidence about the state of the small business sector, which remains battered.

• Euroland markets will focus on whether loans to Greece from IMF and other euro area countries will be on time, i.e. before 19 May when a EUR8.5bn Greek government bond matures. There is a notable risk that the debt crisis will become more contagious next week. This might not be spurred by a specific event, but could be driven by rumours and self-fulfilling expectations. Look for signs that Portuguese and Spanish sovereign rates are rising to unsustainable levels. When that happens we should expect additional measures to be taken by the ECB and other institutions. Next week’s hard data may not get much attention in the market if the debt crisis becomes more contagious. And justly so. Hard data for last quarter matter little if we are heading for a full-scale European debt crisis. In any case, there will not be that many exciting euro area data next week. We expect euro area GDP in Q1 10 due on Wednesday to have been slightly better than market expectations, i.e. around 0.4% q/q, despite bad weather conditions. This forecast is in line with our hard data model, while our soft data model is slightly more upbeat. Euro area industrial orders in March, also due on Wednesday, are projected to mirror the strong German orders and could post a 3% m/m increase.

• Preliminary results from the UK election show that the conservative challenger David Cameron has won most seats, but also that he falls short of a clear majority that would guarantee the ouster of Prime Minister Gordon Brown. In the first hung parliament since 1974, the Conservatives are set to have won 275 seats, while Labour is forecasted to have taken 255. The Liberal Democrats, who were the positive surprise during the election campaign, are set to lose seats as it looks now. The pound has been sold off due to heightened political risk and we believe it will stay volatile in the coming weeks. Additional weakening cannot be excluded.

• Swiss franc reaches new high: EUR/CHF dropped towards 1.40 on Thursday after the Swiss National Bank (SNB) stepped away from interventions at the 1.4325 level that had held since early April. The euro sell-off combined with the franc’s safe-haven status continues to put downward pressure on EUR/CHF. See FX Crossroads for arguments on why the SNB is moving away from using intervention on the currency market.

• Like everywhere else focus in Asia next week will probably be on the developments in the European sovereign debt crisis. In China most economic data for April will be released next week. Because of the fear of overheating and possible bubbles in the property market, we will pay attention to consumer prices and house prices. Consumer price inflation was distorted by the impact from the Chinese New Year holiday in February and March, but in April we will finally get a “true” picture of the current inflation in China. At least so far it does not appear that inflation is getting out of hand, as producer price inflation and the finished good price component inmanufacturing PMI have eased. We only expect inflation to increase modestly to 2.7% y/y in April from 2.4% in the previous month. However, we still expect CPI inflation to exceed 3% y/y in June. We expect activity to have remained strong in April with industrial production increasing 18.0% y/y following a 18.1% increase in the previous month. There are no important releases in Japan next week.

Scandi

• Denmark will see the release of current account and trade balance data for March. Goods exports have suffered during the crisis and are yet to stage a convincing recovery. However, we expect goods exports to have improved in March. The consumer and net retail price indices for April are also due. We expect April consumer price inflation to come out at 2.5% y/y, or 0.2 % m/m.

• In Sweden we receive the always interesting inflation data, but also the quarterly estimate of capacity utilisation. It is fair to expect that the latter will post a strong rebound after the considerably more positive industrial data and corporate comments during Q1.

• As for inflation, we expect a continued moderation of both core and non-core inflationary pressures, but core measures are expected to demonstrate a seasonally normal uptick due mainly to shoe and clothing prices. The main contributing factor to CPI inflation is currently the upswing in interest rate costs for dwellings.

• In Norway attention turns to CPI numbers for April on Monday. We expect underlying inflation to stay at 1.7% in April, unchanged from March. This corresponds to a monthly rise of 0.3% m/m. Headline inflation is expected to fall from 3.4% to 2.9% mainly due to electricity prices. The government is due to present its draft revised budget for 2010 on Tuesday. While we expect no major changes to the fiscal policy set-up, the government’s new forecasts of economic growth and oil prices could lead to a significant downward revision of the oil-adjusted budget deficit. If so, Norges Bank might soon have to resume its foreign currency purchases on behalf of the Government Pension Fund (Petroleum Fund).