Participants focus on impact from Fed tapering

EU Market Update: Participants focus on impact from Fed tapering; spot gold tests $1200/oz

Notes/Observations

- Fed announced its tapering process with $10B reduction in QE starting in January ($5B from Treasuries and $5B from MBS); Total QE now stands at $75B; Forward guidance reassured equity markets with pledge exceptionally low rates until jobless rate falls well past 6.5%and inflation below 2%; Fed Likely to reduce further pace of asset purchases in 'measured steps' if data shows improvement

- Fed's Bernanke press conference that even after the reduction in size of the asset purchase program, Fed will still be adding to its holdings at a "rapid pace."

- -China PBoC did not conduct open market operations (OMO) in its usual time period (5th consecutive session of halted operations); Shanghai Composite closed down 1% for its 8th straight loss. Later in EU session the China PBoC did come in add short-term funding to money market and stated it would continue to provide liquidity as needed

- USD/JPY hit fresh 5-year highs above ¥104 in Asia; Nikkei225 Index ends session +1.7%

- UK Nov Retail Sales mixed in terms of meeting expectations but registers positive readings

- Spain 5-year and 10-year auction results solid. Borrowing costs again fall with better bid-to-cover ratios

Economic Data

- (JP) Japan Oct Final Leading Index CI: 109.8 v 109.9 prelim; Coincident Index: 110.4 v 109.6 prelim

- (JP) Japan Nov Nationwide Dep Store sales Y/Y: 2.4% v -0.6% prior; Tokyo Dept Store Sales Y/Y: No est v 1.2% prior

- (CH) Swiss Nov Trade Balance (CHF): 2.1B v 2.8Be; Real Exports M/M: +4.2% v -3.0% prior; Real Imports M/M: +6.8% v -2.2% prior

- (ES) Spain Oct Industrial Orders NSA Y/Y: -4.0% v -3.4% prior; Industrial Orders WDA -6.4% v -0.5% prior

- (EU) ECB €125M borrowed in overnight loan facility vs. €193M prior; €44.0B parked in deposit facility vs. €43.3B prior - Daily Eurosystem Liquidity Conditions

- (NL) Netherlands Dec Consumer Confidence Index: -16 v -16e

- (NL) Netherlands Nov Unemployment Rate: 8.5% v 8.5%e

- (EU) Euro Zone Oct Current Account Seasonally Adj: €21.8B v €14.9B prior; Current Account NSA (unadj): €26.2B v €15.2B prior

- (IT) Italy Nov Hourly Wages M/M: 0.0% v 0.2% prior; Y/Y: 1.3% v 1.4% prior

- 0 (IS) Iceland Nov Wage Index M/M: 0.2% v 0.2% prior; Y/Y: 6.1% v 6.0% prior

- (UK) Nov Retail Sales Ex Auto M/M: 0.4% v 0.3%e; Y/Y: 2.3% v 2.4%e

- (UK) Nov Retail Sales including Auto M/M: 0.3% v 0.3%e; Y/Y: 2.0% v 2.2%e

- (GR) Greece Q3 Unemployment Rate: 27.0% v 27.1% prior

Fixed Income:

- (ES) Spain Debt Agency (Tesoro) sold total €2.55B vs. €1.5-2.5B indicated range in 2018 and 2023 Bonds

- Sold €1.49B in 3.75% Oct 2018 Bono; Avg yield 2.697% v 2.722% prior (Lowest since July 2005); Bid-to-cover: 2.72x v 2.2x prior; Maximum Yield 2.722% v 2.740% prior

- Sold €1.06B in 4.40% Oct 2023 bono; Avg Yield: 4.098% v 4.164% prior; Bid-to-cover: 3.61x (highest since 2004) v 2.57x prior; Max Yield: 4.121% v 4.176% prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

***Equities**

Indices [Stoxx50 +1.7%, FTSE 100 +0.9% at 6,555, DAX +1.4% at 9,314, CAC-40 +1.5% at 4,171, IBEX-35 +1.9% at 9,625, FTSE MIB +1.4% at 18,384, SMI +1.5% at 7,999, S&P 500 Futures -0.1% at 1,803]

- Market Focal Points: European equity markets opened sharply higher as Fed begins taper of QE and pledged to keep rates low, Banking sector trades higher following gains seen in US banks, SAAB gains over 25% on contract award, FTSE 100 lags on declines in precious metals miners and HSBC, Shanghai equities decline for 8th straight session as money market rates rise sharply

By Sector

- Consumer Discretionary [Mediaset MS.IT +6.5% (consolidation plan), Amadeus AMA.ES +1% (acquisition); SAS SAS.SE -4% (Q4 sales declined y/y)]

- Technology [Keller Group KLR.UK +2% (reaffirmed outlook), SAP SAP.DE +1.5% (Earnings from Oracle); Serco Group SRP.UK -2% (cut FY cash flow outlook)]

- Telecom [Deutsche Telekom DTE.DE +2.5% (renewed takeover speculation related to T-Mobile USA)]

- Industrials [SAAB SAABB.SE +25% (contract award), Meyer Burger MBTN.CH +3% (updated FY guidance), Tessenderlo TESB.BE +3% (CEO change), Vinci DG.FR +2% (contract award); Dassault Aviation AM.FR -3.5% (lost contract)]

- Healthcare [Astrazeneca AZN.UK +1% (acquisition)]

- Energy [Nordex NDX1.DE +3% (awarded order)

- Basic Materials/Resources [Fresnillo FRES.UK -1.5% (declines in precious metals prices)]

- Stoxx50 sectors [Telecom +1.8%,Industrials +1.7%, Technology +1.3%, Financials +1.2%, Energy +1.2%, Consumer Non-Cyclical +1.1%, Consumer Cyclical +0.8%, Basic Materials +0.7%, Utilities +0.5%]

Speakers:

- (CN) China PBoC stated that it added short-term funding to money market and would continue to provide liquidity as needed (**Note: The move by the PBoC came as the central bank refrained from conducting regular open market operations for the past few sessions. Also, interbank trading in China was extended as money market rates hit highs not seen since the June cash crunch)

- Swiss Dec SECO Economic Forecasts lowered its 2013 and 2014 CPI views. SECO saw improving growth through 2015

- Italy employers lobby Confindustria stated that the country's two-year recession was over but effects continued. It trimmed its Q4 GDP growth outlook to 0.2% from 0.3% prior view due to pessimism and falling house prices. It also cut its 2013 GDP forecast from -1.6% to -1.8%. It saw 2014 GDP +0.7% (downside scenario +0.4% with 2015 GDP flat)

- German Bundesbank's Thiele: 32% of all bank transfers in Nov followed SEPA standards

- Basel Committee revision to securitization framework and proposed minimum risk weight of 15% for securitized products vs 20% prior

- Russia President Putin Annual Press Conference stated that he did not oppose the Ukraine-EU trade association but it would have prompted Russia to defend its market. The $15B bailout loan to Ukraine reflected special ties with the country and was not motivated by protests or EU deal. He added that Russia was seeking long term solution to keep gas prices low and that Iskander missiles were not deployed in Kaliningrad region. However, West's effort to build missile defense poses threat to Russia

- Brazil govt issued decree releasing BRL1.9B to States and municipalities to help boost exports

- Japan PM Abe: To pick locations for special economic zones in March

- China Vice Fin Min Zhu: The start of US tapering is welcome, a sign that the US economy is stabilizing; Fed must be mindful of policies' impact on others.

Currencies/Fixed Income:

- The USD has exhibited modest gains over the past 24 hours aided by the FOMC decision. The FED's moderate (friendly) start to the tapering process was supplemented by a more bullish assessment of the economic outlook, especially on the unemployment outlook. However, Dealers pointed out that the overall statement was dovish with the distribution of the FOMC members' expectations for the timing of a first policy firming being shifted out further. The later aiding the US equity market.

- The EUR/USD failed to make a fresh 2013 high on Thursday and fell short the 1.3830 level. The pair hovered around the 1.3680 area in today's session.

- USD/JPY hit fresh 5-year highs above 104.30 and put in play a possible test of 105.00 before year-end

- Spot gold tested $1,200/oz before rebounding a bit. (**Note: The Jun 24th intra-day low was approx 1,179.85/oz). Gold denominated in Euro and Sterling terms tested lows not seen since mid-2010

Political/In the Papers:

- (EU) EU finance ministers said to have approved single resolution mechanism (SRM), system for winding down troubled banks

- (UK) Fitch affirms UK sovereign rating at AA+; outlook Stable

- (UK) BoE's Mccafferty reiterated his view that saw no sudden interest rate hike in 2014

- (US) Fed's Bernanke: Expecting economic growth to pick up in coming quarters, helped by monetary policy and decreasing fiscal drag - post statement news conference; FOMC is determined that inflation will not get too low or too high; Would not expect any changes to the guidance thresholds in the near future.

- (US) FOMC Updated its Economic Forecasts: lowered 2013-2016 unemployment forecasts, widens 2014 GDP forecast

- (US) Senate approved two-year budget agreement (as expected)

- (JP) Japan investors bought net ¥110.5B in foreign bonds last week vs bought net ¥413.2B in prior week (10th straight week of net purchases)

-(JP) Japan may set FY14/15 GDP target at 1.4% - financial press

- (CN) Daily Shibor fixings: 1-week: 6.4720% v 5.9020% prior (4rd consecutive rise, highest since June 26th)

Looking Ahead

All times listed for economic events are denominated in Eastern Standard Time (Add 5 hours for GMT equivalent)

- (CN) US-China to again hold Joint Commission on Commerce and Trade (JCCT) talks in Beijing

- (CH) Swiss government meeting

- (IL) Israel Nov Leading 'S' Indicator M/M: No est v 0.2% prior

- (PT) Portugal Oct Current Account Balance: No est v -€20.1M prior

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 12-Month Bills

- 06:00 (IE) Ireland Nov PPI M/M: No est v -0.4% prior; Y/Y: No est v -0.1% prior

- 06:00 (IE) Ireland Q3 GDP Q/Q: 0.6%e v 0.4% prior; Y/Y: +0.6%e v -1.2% prior

- 06:00 (RU) Russia Gold and Forex Reserve w/e Dec 13th: No estv $511.2B prior

- 06:00 (BR) Brazil Dec IBGE Inflation IPCA-15 M/M: 0.7%e v 0.6% prior; Y/y: 5.7%e v 5.8% prior

- 06:00 (BR) Brazil Nov Unemployment Rate: 4.9%e v 5.2% prior

- 06:00 (IL) Israel Oct Manufacturing Production:

- 06:45 (US) Daily Libor Fixing

- 07:30 (BR) Brazil Nov Total Outstanding Loans (BRL): No est v 2.610T prior; M/M: No est v 0.5% prior; Private Banks Lending: No est v 1.288T prior; Personal Loan Default Rate: No est v 6.8% prior

- 08:00 (PL) Poland Central Bank (NBP) Minutes

- 08:00 (BR) Brazil to sell 2014, 2015 and 2017 Bills

- 08:00 (RO) Romania to sell 2016 Bonds

- 08:30 (US) Initial Jobless Claims: 332Ke v 368K prior; Continuing Claims: 2.77Me v 2.791M prior

- 08:30 (US) Weekly USDA Net Export Sales

- 08:30 (US) Fed's Fisher on Texas economy

- 09:00 (MX) Mexico Oct Retail Sales Y/Y: -1.6%e v -4.0% prior

- 09:00 (EU) EU Leaders begin 2-day Summit in Brussels

- 09:00 (CH) SNB Quarterly Bulletin

- 10:00 (US) Dec Philadelphia Fed Business Outlook: 10.0e v 6.5 prior

- 10:00 (US) Nov Existing Home Sales: 5.02Me v 5.12M prior

- 10:00 (US) Nov Leading Index: 0.7%e v 0.2% prior

- 10:00 (MX) Mexico Central Bank Economist Survey

- 10:00 (US) API Monthly Statistical Report

- 10:30 (US) Weekly EIA Natural Gas Inventories

- 11:00 (CO) Colombia Q3 GDP Q/Q: 0.5%e v 2.2% prior; Y/Y: 4.3%e v 4.2% prior

- 11:00 (BR) Brazil to sell Fixed-rate 2019 and 2023 bonds

- 11:00 (US) Fed to purchase $1.25-1.75B in Notes

- 13:00 (US) Treasury to sell $16B in 5-Year TIPS Reopening

- 13:00 (US) Treasury to sell $29B in 7-Year Notes

- 14:00 (US) Fed to purchase $4.75-5.75B in Notes

- 16:00 (CO) Colombia Oct Retail Sales Y/Y: 4.6%e v 2.3% prior

- 16:00 (CO) Colombia Oct Industrial Production Y/Y: -0.3%e v -1.8% prior

- 19:05 (UK) Dec GfK Consumer Confidence: -11e v -12 prior

- (JP) Bank of Japan (BOJ) Monetary Policy Statement; expected to leave Monetary Base Target unchanged at ¥270T