The continued risk aversion in financial markets yesterday

Market Movers

• Today the market will look for hints on the future path of US monetary policy when Fed’s William C. Dudley (voter, dovish) and John C. Williams (neutral, non-voter) speak.

• Preliminary GDP figures for the fourth quarter for the euro area as well as Germany and Italy are due today. We estimate growth increased marginally to 0.4% q/q in the euro area compared with 0.3% q/q for the third quarter. Regionally, we expect Germany to be the strongest with a growth rate of 0.5% q/q.

• We look for clues about whether US consumption growth has slowed and keep an eye on the retail sales figures for January and the preliminary University of Michigan consumer confidence survey for February. In January, consumers stayed optimistic despite the financial turmoil and weaker economic data.

• In Norway, Q4 manufacturing orders could attract some attention today.

Selected Market News

Yesterday, the Riksbank cut its repo rate by 15bp to -0.50%, flattened the repo rate path out to Q2 17, signalled it stands ready to intervene in the FX market and said it will reinvest maturities and coupons, while prepared to do more QE. The Riksbank for the first time mentioned purchases of linkers. It reacts to deterioration of the Swedish inflation outlook, which puts it at risk of not meeting its inflation mandate – it reduced its inflation forecast by 0.4pp for 2016.

The continued risk aversion in financial markets yesterday, leading to further selling of riskier assets such as stocks and commodities, led to a temporary inversion in the front end of the USD rate curve, i.e. the market was tempted to start pricing the probability that the Federal Reserve might reverse its rate hike from December. A sign that the market is increasingly sceptic that additional rate hikes in the US can be justified in the current economic situation.

Another area where the downbeat sentiment was taken to another level was the US crude oil market. The contango in the front end of WTI crude forward curve widened to the highest level since 2008. This signals a significant sell-off in the physical market as demand is weak and inventory levels are high. The oil price found support overnight from comments from UAE oil minister Suhail Al Mazrouei, hinting that coordination among major oil producers to stabilise oil markets could be in the cards.

Yesterday, USD/JPY experienced a sudden spike from a level below 1.12 to above 1.13 and later settled around 1.12 without any obvious trigger. It spurred speculation that Bank of Japan was actively intervening in FX markets to weaken the JPY. The JPY has risen since Bank of Japan cut its key policy rate to negative in January, further weighing on the outlook for Japanese inflation.

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