Risk aversion again envelops global markets

EU Mid-Market Update: Risk aversion again envelops global markets; UK jobless claims beats expectations

Notes/Observations

- Renewed drop in oil prices and a sharp decline in China's foreign direct investment sparked a fresh bout of risk aversion

- Oil extends decline to fresh 12-Year lows

- PBoC economist Ma Jun: CNY 600B injection via MLF, SLF and PSL may substitute for a RRR cut

- UK Dec Jobless Claims beats expectations (-4.3K vs. +2.8Ke) while average wages fall to lowest level since Feb

- Japan provides some verbal intervention to curb back recent yen strength

Economic data

- (DE) Germany Dec PPI M/M: -0.5% v -0.4%e; Y/Y: -2.3% v -2.2%e

- (TW) Taiwan Dec Export Orders Y/Y: -12.3% v -7.0%e

- (ZA) South Africa Dec CPI M/M: 0.3% v 0.3%e; Y/Y: 5.2% v 5.2%e

- (ZA) South Africa Dec CPI Core M/M: 0.3% v 0.3%e; Y/Y: 5.2% v 5.3%e

- (UK) Dec Jobless Claims Change: -4.3K v +2.8Ke; Claimant Count Rate: 2.3% v 2.3%e

- (UK) Nov Average Weekly Earnings 3M/Y: 2.0% v 2.1%e; Weekly Earnings (ex Bonus) 3M/Y: 1.9% v 1.8%e

- (UK) Nov ILO Unemployment Rate 3M/3M: 5.1% v 5.2%e; Employment Change 3M/3M: +267K v +235Ke

Fixed Income Issuance:

- (IN) India sold total INR150B in 3-month and 12-month Bills

- (EU) ECB allotted $102.0M in 7-day USD Liquidity Tender at fixed 0.86% vs. $125M prio

- (SE) Sweden sold SEK4.0B vs. SEK4.0B indicated in 1% 2026 Bonds; Avg Yield: 0.9784% v 1.0596% prior; Bid-to-cover: 2.57x v 1.75x prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx50 -3.1% at 2,886, FTSE -2.8% at 5,709, DAX -3.1% at 9,368, CAC-40 -3.3% at 4,131, IBEX-35 -2.6% at 8,331, FTSE MIB -3.0% at 18,304, SMI -3.1% at 7,965, S&P 500 Futures -1.8%]

- Market focal points/key themes: European stocks open down following poor performance in Asia after disappointing data from China; Materials stocks pulled down on commodity prices; further depression in energy stocks with oil continuing to slide; risk-aversion returns to markets; Italian banks open down significantly, with Monte de Pasci failing to open, continuing concerns over NPL; focus turning to ECB policy meeting tomorrow; upcoming US earnings include Goldman Sachs and Kinder Morgan; Novartis expected after the European close

**Sectors

- Consumer discretionary [Kappahl KAH.SE +5.4% (results), JD Wetherspoon JDW.UK -6.4% (holiday trading update), WH Smith SMWH.UK +6.6% (Christmas trading)]

- Energy [Genel Energy GENL.UK -9.9% (trading update), Royal Dutch Shell RDSA.NL -5.2% (Prelim Q4 results), BG Group BG.UK -1.8% (trading update)]

- Financials [Zurich Insurance ZURN.CH -8.0% (outlook)]

- Industrials [Bouygues EN.FR -2.6% (awarded contract), BMW BMW.DE -2.2% (analyst action)]

- Materials [Hochschild Mining HOC.UK +3.8% (production update), Fresnillo FRES.UK -3.9% (production report)]

- Technology [Software SOW.DE -0.1% (IBM results)]

Speakers

- ECB's Nowotny (Austria) reiterated difficulty in reaching ECB inflation target. Core inflation was more in equilibrium verse headline inflation

- ECB's Vasiliauskas (Lithuania) reiterated view that QE effect for euro zone was positive with measures seen adding 0.1% to Lithuania's 2016 GDP

- EU's Moscovici: Greece discussions have been very constructive in its overall climate

- Poland Central Bank Gov Belka main challenges for monetary policy are external; includes China economic slowdown, lower commodity prices and Fed rate path

- Poland Central Bank member Gatnar: Polish interest rate level was appropriate and recent weakening of PLN currency (Zloty) seen as temporary

- Poland Central Bank's Raczko: Poland will have negative headline inflation until June

- Turkey Presidential economic advisor Bulut stated that efforts to lower interest rates must continue and the silly cycle of higher interest rates must be broken. Turkey has shown that it can be independent from the Fed

- Czech Central Bank Gov Singer: Both interest rates and FX floor should be of less use around the end of 2016

- Hungary Central Bank's Palotai stated that it needed loose monetary conditions for longer period than assumed but rate cuts were not on the agenda

- Hong Kong Govt stated that it would sell USD if currency fell to weak end of the HK$7.75-HK$7.85 trading band

- Japanese govt official: Closely watching FX markets

- Japan Cabinet Office (Govt) Monthly Report for Jan maintained overall economic assessment with Japan on a moderate recovery but with "weakness" seen in some areas

- Japan Chief Cabinet Sec Suga stated that decline in oil prices was having positive effect on domestic economy. BOJ Gov Kuroda had previously stated that central bank would not hesitate to adjust policy if improvement in inflation trend was disrupted

- Indonesia Central Bank said to have room for further easing due to low oil prices as inflation eases

- IMF: Changing the Saudi Arabia currency peg not appropriate or necessary (**Note the riyal has been pegged to the US dollar at ~3.75 since 2007)

- Saudi Arabia said to order halt to riyal forward option trades

Currencies

- EUR/USD moving towards the upper end of its 5-big figure range and trading around 1.0940 just ahead of the NY morning. ECB meets on Thursday and was expected to keep policy unchanged with Draghi likely to deliver a dovish press conference that kept the door open to further easing

- Hong Kong Dollar currency forwards fell to weakest level since 1999 on speculation the city will end its 32-year-old currency peg (HK$7.75-HK$7.85 range). Hong Kong dollar dropped as low as HK$7.8229, within 0.35 percent of the weak end of its band

Fixed Income:

- Bund futures trade at 161.11 up 94 ticks after sharp losses in Brent and WTi Oil futures put pressure on Equities. Futures traded as high as 161.30 marking the highest level since May 2015 with yields dipping below 0.5%. Having taken out November high and 161.26 resistance analyst eye 161.57 as resistance. Support moves to 160.54 then 160.24 gap fill with continuation seeing 159.83 then 159.53.

- Gilt futures trade at 119.75 up 55 ticks off highs on the back of encouraging Jobs data out of the UK with ILO unemployment rate falling to 5.1%. This helped futures come off earlier highs of 120.01 which marked the highest level since April 2015. A break of 120.01 targets 120.27 with a break seeing 120.61. Support moves to 119.34 gap fill with follow through seeing 119.18 then 118.75.

Today sees the DMO sell £4.0B in 5 year Gilts the equivalent of 21K Gilt futures.

- Wednesday's liquidity report showed Tuesday's excess liquidity fell to €638.1B a fall of €2.8B from €640.9B prior. This was primarily due to AFs and MonPol portfolios rising to negative €216.1B. AFs are negative when the MonPol portfolios exceeds the liquidity absorbing effect of AFs. Use of the marginal lending facility rose to €100M from a prior €54M.

- Corporate issuance saw no issuance yesterday as market volatility continues to put potential issuers on the sidelines. This weeks issuance is estimated at around $20-25B. Estimates for Monthly IG issuance are approximately $125B. For the week ending 13th Jan, Lipper US Fund flows reported $740.1M of outflows bring YTD net outflows of $1.87B in IG and for High Yield saw $2.11B in net outflows for the week bringing YTD net outflows of $2.92B.

Looking Ahead

- 05:30 (UK) DMO to sell £4.0B in 1.5% 2021 Gilts

- (PT) Portugal Debt Agency (IGCP) to sell combined €1.0-1.25B in 6-month and 12-month Bills

- 06:00 (ZA) South Africa Nov Constant Retail Sales M/M: 0.6%e v 0.2% prior; Y/Y: 2.7%e v 3.3% prior

- 06:00 (CZ) Czech Republic to sell 2018, 2023 and 2028 bonds

- 07:00 Russia to sell combined RUB28B in 2025 and 2027 OFZ bonds

- 07:00 (US) MBA Mortgage Applications w/e Jan 15th: No est v 21.3% prior

- 07:00 (UK) PM Cameron weekly Question Time in House of Commons

- 07:45 (US) Weekly Goldman Economist Chain Store Sales

- 08:00 (PL) Poland Dec Average Gross Wages M/M: 8.9%e v 1.3% prior; Y/Y: 3.5%e v 4.0% prior

- 08:00 (PL) Poland Dec Employment M/M: 0.0%e v 0.2% prior; Y/Y: 1.2%e v 1.2% prior

- 08:15 (US) Baltic Dry Bulk Index

- 08:30 (US) Dec Housing Starts: 1.200Me v 1.173K prior; Building Permits: 1.200Me v 1.282M prior (revised from 1.289M)

- 08:30 (US) Dec CPI M/M: 0.0%e v 0.0% prior; Y/Y: 0.8%e v 0.5% prior

- 08:30 (US) Dec CPI Ex Food and Energy M/M: 0.2%e v 0.2% prior; Y/Y: 2.1%e v 2.0% prior

- 08:30 (US) Dec CPI NSA Index: 236.672e v 237.336 prior; CPI Core Index (Seasoanlly Adj): 244.494e v 244.135 prior

- 08:30 (US) Dec Real Avg Weekly Earnings Y/Y: No est v 1.6% prior

- 08:30 (CA) Canada Nov Wholesale Trade Sales M/M: +0.5%e v -0.6% prior

- 08:30 (CA) Canada Nov Manufacturing Sales M/M: +0.5%e v -1.1% prior

- 08:55 (US) Weekly Redbook Retail Sales

- 09:15 (DE) German Chancellor Merkel with Fin Min Schaeuble at regional CSU meeting in Bavaria

- 09:30 (BR) Brazil Weekly Currency Flows Weekly

- 10:00 (CA) Bank of Canada (BOC) Interest Rate Decision: Expected to leave Interest Rates unchanged at 0.50%

- 10:00 (CA) Bank of Canada (BOC) Monetary Policy Report

- 11:30 (US) Treasury to sell 4-Week Bills

- 15:00 (MX) Mexico weekly Banamex survey

- 16:30 (NZ) New Zealand Dec Manufacturing PMI: No est v 54.7 prior

- 16:30 (US) Weekly API Oil Inventories

- (BR) Brazil Central Bank (BCB) Interest Rate Decision: Expected to raise the Selic Target Rate by 50bps to 14.75%

- 19:00 (NZ) New Zealand Jan ANZ Consumer Confidence Index: No est v 118.7 prior; M/M: No est v 3.3% prior

- 19:01 (UK) Dec RICS House Price Balance: 50%e v 49% prior

- 22:35 (JP) Japan to sell 3-Month Bills

- 22:45 (JP) Japan to sell 20-Year JGB Bonds