German IFO expectations are expected to show signs of improvement

Market movers today

• German IFO expectations are expected to show signs of improvement. We forecast an increase for the first time since April. The ZEW expectations increased for the first time in 10 months in November and although many do not like the financial ZEW expectations, they are usually a good indicator.

• Weidman is scheduled to speak and it will be interesting to hear his response to the ‘doves’. ECB’s Honohan (Ireland) and Nouy (SSM Chair) will also speak today.

• The oil market will focus on the outcome of the Iran nuclear negotiations, which are set to conclude in Vienna today.

• The Danish refinancing auctions continue today. The mortgage banks will sell DKK20.6bn DKK bonds. Hence, we will see a significant drop in the total auction amount compared to last week.

Selected market news

The People’s Bank of China (PBoC) slashed it policy rates on Friday. The one-year benchmark deposit rate was cut by 25bp to 2.75% and the one-year benchmark lending rate was cut by 40bp to 5.6%. It suggests that China now has a more substantial easing bias in monetary policy and the government’s attempts to contain credit growth will be loosened somewhat in coming months. Hence, supporting growth now appears to be a higher priority. The interest rate cut is very positive for risk sentiment and is particularly positive for emerging markets and commodities. See China cuts interest rates – positive for risky assets. Oil prices rose about USD81 a barrel and EUR/NOK dropped below 8.42 on Friday.

However, the PBoC was not the only central bank adding to the positive sentiment on Friday. ECB President Draghi said that ‘we will do what we must to raise inflation and inflation expectations as fast as possible, as our price-stability mandate requires’ and he added that some inflation expectations ‘have been declining to levels that I would deem excessively low’. His dovish speech was complemented by ECB Vice President Constancio over the weekend who said ‘in the first quarter of next year, we have to assess if indeed the [current purchase] programmes are contributing to a pace of increase of our balance sheet that is compatible with the sort of expectation that we have for those programmes. And if not, then we have to consider other options’. It is hard not to interpret the latter as an acceptance of government bond purchases as early as Q1 next year. Peripheral bonds rallied strongly on the Draghi comment, the 10 year EUR swap rate dropped below 1% and EUR/USD came under renewed pressure.

The big market mover for oil this week will be the OPEC meeting on Thursday. This weekend an Iranian news agency said that Iran will propose a cut in production of 1mb/d to prop up prices. Note also that today is the deadline for a final agreement regarding the Iranian sanctions. However, according to media reports a new deal will not be struck and an extension of the talks seems likely.