The unemployment rate reached 10.7% in October 2015

Market Movers

• The market is expected to continue to focus on China’s exchange rate management and the state of its economy more broadly. Concerns about the impact on the rest of the world has been the key market mover both in emerging markets and in advanced economies over the past few days.

• Developments in the oil price will also continue to remain in focus. The oil price slumped further on Wednesday to its lowest level since 2004, causing significant falls in currencies of oil-producing countries and oil-related assets.

• In the euro area, the unemployment rate and retail sales for November are set to be released. The unemployment rate reached 10.7% in October 2015, down from 11.5% a year earlier. We expect the downward trend to continue, as activity should pick up and potential growth remains very low. The progress in the labour market, together with the low oil price, supported growth in private consumption in 2015. We expect this to continue to be reflected in the retail sales figure for November, where we look for an increase of 0.4% m/m.

• In Germany we get numbers for factory production. Following three months of declines, factory orders recovered somewhat in October, when they were up 1.8% m/m. We look for them to start following their usual volatile pattern and expect a monthly decline of 0.9% but we see potential upside risk to our forecasts as the latest German survey indicators have improved.

Selected Market News

Chinese shares fell sharply, leading to a closure of the Chinese equity markets as losses on the CSI 300 exceeded 7%, triggering for the second time this week the newly implemented circuit breaker system requiring a close of the stock exchange. The sell-off was caused by pressures in the foreign exchange markets, after the People’s Bank of China reduced its fixing by 0.5% to 6.56, the lowest level since 2011, prompting concerns that further currency depreciation could lead to liquidity problems in the wider economy. The offshore Yuan initially lost ground but then later strengthened, probably as the central bank stepped in to support the currency. After the trading halt on Thursday, the regulator published new permanent rules restricting share purchases by large shareholders as well as corporate management and directors.

The Chinese problems sent jitters through Asian stock and currency markets. The Nikkei is down 2.25%, while other Asian markets are falling by 0.5% to 1.5%. On the FX side, most Asian currencies lost ground versus the USD. The oil price continues its slide this morning, falling over 2% with Brent trading at USD33.42 per barrel.

In the US last night, the minutes of the 15-16 December FOMC meeting, where the Fed delivered its first hike since June 2006, were more dovish than the statement and Janet Yellen’s tone at the press conference. The minutes revealed that, although the hike was unanimous, it was a ‘close call’ for ‘some’ FOMC members. However, the market reaction was fairly muted after the release.

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