Peripheral States and emerging Europe take advantage

EU Market Update: Peripheral States and emerging Europe take advantage of declining yields to issue debt with demand to match appetite

Notes/Observations

- FOMC Minutes: Members saw waning benefits from monthly bond purchases and many FOMC members favoured QE tapering in 'measured steps'; most were inclined to retain current thresholds

- Mixed Australian data; Nov Retail Sales rise for the 5th straight month (M/M: 0.7% v 0.4%e) while Building Approvals fell for the 2nd straight month (YoY: -1.5% v -1.0%e)

- Chinese Inflation data continue to come in softer than expected; CPI hits 7-month low (YoY: 2.5% vs. 2.7%e) while PPI fell for the 22nd straight month (YoY: -1.4% v -1.35e)

- Bank of Korea (BoK) left its 7-Day Repo Rate unchanged at 2.50% for the 8th straight meeting (as expected) Maintained its 2014 growth outlook at 3.8% but trimmed its inflation view to 2.3% from 2.5%

- BoE and ECB will meet today; no changes expected

- Peripheral States and emerging Europe take advantage of declining yields to issue debt with demand to match appetite (Ireland, Portugal, Slovakia and Spain all issued debt this week)

- Spain begins 2014 bond issuance on solid footing. 5-year yield issued at record low level of 2.411. The 10-year Spanish/German Gov't bond spread at approx 180bps; tightest since April 2011 following the auction results

Economic Data

- (FR) France Nov Trade Balance: -€5.7B v -€4.6Be

- (CZ) Czech Nov Industrial Output Y/Y: 6.2% v 3.7%e; Construction Output Y/Y: -9.3% v -1.0% prior

- (CZ) Czech Dec CPI M/M: 0.4% v 0.3%e; Y/Y: 1.4% v 1.3%e

- (CZ) Czech Q3 Final GDP Q/Q: +0.2% v -0.1% prelim; Y/Y: -1.2% v -1.3% prelim

- (CZ) Czech Dec Unemployment Rate: 8.2% v 8.2%e

- (HU) Hungary Nov Preliminary Trade Balance: €803.5M v €685.0Me

- (DK) Denmark Nov Current Account Balance (DKK): 12.1B v 18.4B prior; Trade Balance (ex-Shipping): 5.5B v 9.3B prior

- (EU) ECB €656M borrowed in overnight loan facility vs. €293M prior; €48.6B parked in deposit facility vs. €95.1B prior - Daily Eurosystem Liquidity Conditions

- (NL) Netherlands Dec CPI M/M: +0.1% v -0.4%e; Y/Y: 1.7% v 1.2%e

- (NL) Netherlands Dec EU CPI Harmonized M/M: +0.1% v -0.6% prior; Y/Y: 1.4% v 1.2% prior

- (NO) Norway Nov Retail Sales W/Auto Fuel M/M: 0.5% v 0.4%e

- (NO) Norway Nov Credit Indicator Growth Y/Y: 6.0% v 6.1%e

- (IT) Italy Q3 YTD Deficit to GDP Ratio: 3.7% v 4.1% prior

- (UK) Nov Visible Trade Balance: -£9.4B v -£9.4Be; Total Trade Balance: -£3.2B v -£2.3Be; Trade Balance Non EU:-£3.0B v -£3.5Be

- (EU) Euro Zone Dec Business Climate Indicator: +0.27 v +0.22e; Consumer Confidence: -13.6 v -13.6e; Economic Confidence: 100.0 v 99.1e; Industrial Confidence: -3.4 v -3.0e; Services Confidence: +0.2 v -0.5e

- (IT) Bank of Italy Dec Balance-Sheet Aggregates at €235.9B v €227.7B prior; first rise in 10 months

- (GR) Greece Nov Industrial Production Y/Y: -6.1 v -5.2% prior

- (GR) Greece Oct Unemployment Rate: 27.8% v 27.4% prior; record high

Fixed Income:

- (ES) Spain Debt Agency (Tesoro) sold total 5.29B vs. €4.0-5.0B indicated range in 2019 and 2028 bonds

- Sold €3.53B in new 2.75% Apr 2019 Bono; Avg yield 2.382% (record EU low) v 2.697%; Bid-to-cover: 1.8x v 2.72x prior; Maximum Yield 2.411% v 2.722% prior; Tail 2.9bps

- Sold €1.76B in 5.15% Oct 2028 Bono; Avg Yield 4.192% v 4.809% prior; Bid-to-cover: 2.7x v 2.73x prior; Max Yield 4.198% v 4.829% prior; Tail: 0.6bps v 2.0bps prior

- (FR) France Debt Agency (AFT) sold total € vs.€7.5-8.5B indicated range in 2020, 2024 and 2060 bonds

- Sold €1.475B in 2.5% 2020 Oats; Avg Yield 1.67% v 1.83% prior; Bid-to-cover: 3.0x v 3.64x prior

- Sold €5.046B in new 2.25% 2024 Oat; Avg Yield: 2.51% v 2.41% prior; Bid-to-cover: 1.54x v 1.98x prior

- Sold €1.805B in Apr 4% 2060 Oats; avg yield 3.53% v 3.27% prior; Bid-to-cover: 1.98x v 2.33x prior

- (PT) Portugal Debt Agency (IGCP) to sell Euro benchmarked Jun 2010 bonds via syndicate; guidance seen at +340bps over mid-swaps

- (SK) Slovakia Debt Agency to sell 15-year Euro-denominated bond; guidance seen around +110bps over mid-swaps

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

***Equities**

Indices [Stoxx50 +0.4%, FTSE 100 +0.3% at 6,743, DAX +0.4% at 9,531, CAC-40 +0.2% at 4,269, IBEX-35 +0.7% at 10,327, FTSE MIB +0.8% at 19,606, SMI flat at 8,352, S&P 500 Futures +0.3% at 1,837]

- Market Focal Points: Most indices higher ahead of ECB and BoE meetings as peripheral indices continue to outperform, EuroStoxx50 hits 5-year high, UK retailers continue to disappoint (Tesco and Morrisons), Mining shares continue to lag, Technology sector supported by ASML, Energy services firm TGS raises outlook, Management changes weigh on Standard Chartered, French chemicals firm Arkema cuts outlook, UK IT services firm Spirent Communications issues cautious outlook, China inflation data below expectations, Upcoming US same store sales reports and weekly jobless claims

By Sector

- Energy [TGS Nopec TGS.NO +12% (raised outlook), Tullow Oil TLW.UK +2% (vague merger speculation), Heritage Oil HOIL.UK +4% (production update)]

- Consumer Discretionary [Greggs GRG.UK +7.5% (reaffirmed outlook), Laird LRD.UK +7% (broker commentary, guidance), Gerry Weber +6% (Q4 sales +22%), Marks & Spencer MKS.UK +3% (weak sales results in line with expectations), Axel Springer SPR.DE +2% (broker commentary); Morrison Supermarkets MRW.UK -5% (cut outlook),Tesco TSCO.UK -2.5% (profit warning), Havas HAV.FR -2% (CEO resignation)]

- Financial [Raiffeisen Bank RBI.AT -9% (capital raise speculation), Standard Charted STAN.UK -3% (management changes)]

- Technology [Pace PIC.UK +3% (raised outlook); Spirent Communications SPT.UK -9% (profit warning), Arm Holdings ARM.UK -3% (broker commentary)]

- Industrials [Arkema AKE.FR -3% (profit warning)]

- Stoxx50 Sectors [Technology +1.6%, Consumer Cyclical +0.8%, Telecom +0.7%, Energy +0.7%, Financials +0.5%, Industrials +0.5%, Consumer Non-Cyclical +0.5%, Utilities +0.3%; Basic Materials -0.1%]

Speakers:

- ECB's Coeure said to replace Noyer at Bank of France in 2015

- France Trade Min Bricq: Nov trade balance was not good due to lower aeronautical deliveries. He noted that the country's trade deficit was a structural issue. He forecasted 2013 trade deficit ~€60B compared to €73B deficit in 2012

- Italy govt might meet to discuss sales of up to 40% stake in Post office in 2014

- Ukraine PM Azarov stated that the country to have stable prices and currency in 2014 and that its budget proposal was realistic for this year

- Iran Supreme Leader Ayatollah Ali Khamenei: Nuclear talks with P5+1 show hostility towards Iran and the Muslim world

Currencies/Fixed Income:

- FX markets were awaiting the decision from the BOE and ECB. Overall analysts expected no changes to either central bank policies. Any surprise from the BOE could come in the form of a statement. BOE Gov Carney could amend its forward guidance in coming months by changing the unemployment benchmark at which an interest rate hike would be considered to 6.5% from 7%.

- The focus on the ECB would be the post rate decision Draghi press conference. Although its economy has improved in recent readings the Euro Zone CPI YoY reading has been below 1.0% for the past three months.(**Note: ECB targets CPI inflation below, but close to 2% over the medium term). The Dec Unemployment Rate came in at 12.1%, just off its record high level. Also dealer will look for commentary on the Euro currency and its recent strength following the Fed's decision to begin tapering last month. The Eonia rates rose into year end and the SMP program was not fully sterilized in 4 of the 5 last weeks of 2013 could also be subject to questioning in the press conference

- Fed minutes offered little additional information but dealers were watching the belly of the US yield curve from the forward guidance approach.

- Spain began 2014 bond issuance on solid footing. Its 5-year yield issued at record low level of 2.411%. The 10-year Spanish/German Gov't bond spread at approx 180bps; tightest since April 2011 following the auction results

- Morgan Stanley analyst: Turkey risks still not priced in; Sees TRY currency (Lira) weakening to 2.3 in Q2

- Goldman Sachs economist Kwon: Maintains view that Bank of Korea (BOK) will enact another rate cut in near term

Political/In the Papers:

- (EU) EU's Barroso: Expecting the EU economy to perform better in 2014, cant say EU crisis is completely over as the unemployment rate remains too high

- (PT) Portugal planning to reopen 4.75% June 2019 euro bond, has hired banks for offering - press

- (PT) Portugal Fin Min Albuquerque: Financing conditions are improving, falling yields are encouraging for the market

- (ES) Spain Deputy PP leader Cospedal: Spain GDP may beat 0.7% forecast in 2014

- (IR) Negotiations between Iran and P5+1 have stalled over debate on advanced centrifuge research - press

- (CN) PBoC did not conduct open market operations (OMO) in today's session (5th consecutive session of halted operations); Zero net position this week v drained CNY29B in prior week

- (JP) Japan said to be mulling plans to close corporate tax loopholes - Japanese press

Looking Ahead

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

- U.S. Retailers Report December Sales

- (EU) EU Climate Change Committee Meeting Vote on Backloading

- Czech Social Democrat leader Sobotka to meet President Zeman to discuss proposed Cabinet lineup

- (US) Treasury Financial Stability Oversight Council meeting

- (RU) Russia Dec Reserve Fund: No est v $86.9B prior; Wellbeing Fund: No est v $88.1B prior

- (RU) Russia Dec Final CPI M/M: No est v 0.5% prelim; Y/Y: No est v 6.5% prelim; CPI YTD: No est v 6.55 prelim

- (RU) Russia Dec Core CPI M/M: 0.5%e v 0.6% prior; Y/Y: 5.7%e v 5.6% prior

- 06:00 (DE) Germany Nov Industrial Production M/M: +1.5%e v -1.2% prior; Y/Y: 3.0%e v 1.0% prior

- 06:00 (ZA) South Africa Nov Manufacturing Production M/M: No est v 6.9% prior; Y/Y: 0.3%e v 1.5% prior

- 06:00 (RU) Russia Gold and Forex Reserve w/e Jan 3rd: No est v $508.5B prior

- 06:00 (PT) Portugal Nov Trade Balance: No est v -€1.1B prior

- 06:45 (US) Daily Libor Fixing

- 07:00 (UK) Bank of England Bank (BOE) Interest Rate Decision: expected to leave both Interest Rate and Asset Purchase Target (APT) unchanged at 0.50% and £375B respectively

- 07:00 (UK) BOE Statement

- 07:30 (US) Dec Challenger Job Cuts: No est v K prior; Y/Y: No est v -20.6% prior

- 07:30 (US) Jan RBC Consumer Outlook Index: No est v 49.7 prior

- 07:45 (EU) ECB Interest Rate Decision: Expected to leave key rates unchanged. Expected to leave Main Refi Rate unchanged at 0.25%; Expected to leave Deposit Facility Rate unchanged at 0.00%; Marginal Lending Facility unchanged at 0.75%

- 08:30 (US) Initial Jobless Claims: 335Ke v 339K prior; Continuing Claims: 2.85Me v 2.833M prior

- 08:30 (CA) Canada Dec Housing States: 190.0Ke v 192.2K prior

- 08:30 (CA) Canada Nov Building Permits M/M: -2.7%e v 7.4% prior

- 08:30 (CA) Canada Nov New Housing Price Index M/M: 0.1%e v 0.1% prior; Y/Y: No est v 1.5% prior

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

- 08:30 (EU) ECB'S Draghi holds post rate decision Press Conference

- 09:00 (MX) Mexico Oct Economic Activity Y/Y: 1.4%e v 0.8% prior

- 09:00 (MX) Mexico Dec CPI M/M: 0.5%e v 0.9% prior; Y/Y: 3.9%e v 3.6% prior; CPI Core M/M: 0.3%e v 0.1% prior

- 10:00 (US) House Monetary Policy subcommittee hearing on Feb bond buying

- 11:00 (US) Fed to purchase $0.6-0.9B in Notes

- 13:00 (US) Treasury to sell $13B in 30-Year Bonds Reopening

- 13:30 (US) Fed's George

- 18:00 (PE) Peru Central Bank Interest Rate Decision: Expected to leave Reference Rate unchanged at 4.00%

- 19:01 (UK) Dec BRC Sales Like-For-Like Y/Y: No est v 0.6% prior

- 20:00 (US) Fed's Kocherlakota

- 21:00 (CN) China Dec Trade Balance: $32.2Be v $33.8B prior; Exports Y/Y: 5.0%e v 12.7% prior; Imports Y/Y: 5.0%e v 5.3% prior