EU Commission cuts 2016 growth and inflation forecasts

EU Mid-Market Update: EU Commission cuts 2016 growth and inflation forecasts; focus turns to BOE and whether the lone hawk comes back into the majority

Notes/Observations

- Markets reassessing the number of Fed rate hikes in 2016; USD softer over the past 24 hours; 60% change that Fed tightening might be done for now

- BOE in focus: Policy expected to remain on hold, but the inflation report to clarify central bank's assessment of developments in oil prices and the outlook for the world economy

- EU Commission Winter Forecasts cut both growth and inflation forecast for 2016

Economic data

- (CH) Swiss Jan SECO Consumer Confidence: -14 v -15e

- (UK) Jan Halifax House Prices M/M: 1.7% v 0.1%e; 3M/3M: 9.7% v 9.0%e

- (DE) Germany Jan Construction PMI: 57.9 v 55.5 prior

- (CN) China Q4 Preliminary Current Account: $84.3B (surplus) v $60.3B q/q

**Fixed Income Issuance:

- (ES) Spain Debt Agency (Tesoro) sold total €2.78B vs. €2.5-3.5B indicated range in 2026 and 2037 bonds

- Sold €2.19 in 1.95% 2026 bono; Avg Yield: 1.694% v 1.461% prior; Bid-to-cover: 1.86x v 2.62x prior; Max Yield: 1.717% v 1.477% prior

- Sold €590.6 in 4.20% Jan 2037 bono; Avg Yield 2.614% v 2.701% prior; Bid-to-cover: 2.62x v 2.33x prior; Max Yield: 2.629% v 2.710% prior

- (ES) Spain Debt Agency (Tesoro) sold €2.78B vs. €0.25-0.75B indicated range in 0.55% I/L 2019 bond (SPGBei;Bonoei); Yield: -0.096% v -0.251% prior; Bid-to-cover: 2.86x v 2.77x prior

- (FR) France Debt Agency (AFT) sold total €8.49B vs. €7.5-8.5B indicated range in 2025, 2026 and 2038 Oats

- Sold €5.09B in 1.00% Nov 2025 Oat; Avg Yield: 0.64% v 0.86% prior; Bid-to-cover: 2.34x v 1.44x prior

- Sold €1.33B in 3.5% Apr 2026 Oat; Avg Yield: 0.67% v 0.96% prior; Bid-to-cover: 4.07x v 2.32x prior

- Sold €2.066B in 4.00% Oct 2038 Oat; Avg Yield: 1.48% v 4.61% prior; Bid-to-cover: 1.92x v 2.8x prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx50 +1.2% at 2,932, FTSE +1.7% at 5,935, DAX +0.9% at 9,522, CAC-40 +0.7% at 4,256, IBEX-35 +1.3% at 8,419, FTSE MIB +0.9% at 17,569, SMI -0.3% at 8,101, S&P 500 Futures +0.5%]

Market Focal Points/Key Themes: Major European indices opened higher relative to yesterdays close despite giving back some gains in the morning session, after a mixed Asian session where Chinese indices closed higher while the Nikkei closed down; ING Groep leading the gains in the Eurostoxx after better than expected Q4 results; FTSE strength being led by the commodity stocks such as Anglo American and Glencore after a recovery in oil prices boosted sentiment, despite AstraZeneca weighing on the index after guiding revenue drop as its Crestor patent expires; the Swiss SMI being weighed down by Credit Suisse and UBS on large volume after CS reported disappointing results; upcoming notable US earnings include AmerisourceBergen, Arrow Electronics, Cigna Corp, Cummins, ConocoPhillips, and Philip Morris International

Equities

- Consumer discretionary: [Adidas ADS.DE +1.6% (GS analyst upgrade)]

- Energy: [Neste Oil NES1V.FI +7.5% (Q4 results), Royal Dutch Shell A RDSA.NL +3.9% (Q4 results), Statoil STL.NO +7.0% (Q4 results, Introduces two-year scrip dividend programme starting 4Q15)]

- Financials: [Credit Suisse CSGN.CH -11.0% (Q4 results), DNB NOR DNB.NO +1.1% (Q4 results), ING Groep INGA.NL +9.1% (Q4 results), Leonteq LEON.CH -23.1% (FY15 results), Skandinaviska Enskilda SEBA.SE +6.5% (Q4 results)]

- Healthcare: [AstraZeneca AZN.UK -4.2% (Q4 results, guided initial FY16 Core EPS low to mid single digit percentage decline, Crestor patent expires), Smith and Nephew SN.UK -0.7% (FY15 results)]

- Industrials: [Daimler DAI.DE -3.2% (Q4 results), GEA Group G1A.DE +8.0% (FY15 results), Metso OYJ MEO1V.FI +2.4% (Q4 results), Skanska AB SKAB.SE -2.1% (Q4 results), Trelleborg AB-B TRELB.SE +3.4% (Q4 results)]

- Telecom: [Mobistar MOBB.SE -0.9% (Q4 results), Swisscom SCMN.CH -2.3% (FY15 results), Vodafone VOD.UK +0.2% (Q3 results)]

- Technology: [Dassault Systems DSY.FR -1.1% (Q4 results), Fingerprint Cards FINGB.SE +3.9% (Q4 results, raises FY16 outlook), Mycronic MTCR.SE -12.3% (Q4 results)]

Speakers

- ECB chief Draghi stated that global forces were holding down levels of inflation but saw no reason for permanently lower inflation. Global disinflationary forces could be tamed. Long term inflationary expectations remained below price stability and low inflation for too long could lead to 2nd round effects. No reason for central banks to resign their mandates and ECB would not surrender to low inflation. Specific Euro Area challenges were no reason for inaction. Risks would not stand in the way of more easing

- ECB Economic Bulletin noted that the path of 2016 inflation was significantly lower than Dec forecast (in line with Draghi Jan press conference). Global growth remained bumpy and uneven while Euro Area recovery was continuing on private investment but held back by export growth

- ECB again lowered emergency liquidity assistance (ELA) cap for Greece banks to €71.5B vs. €71.8B prior

- Poland govt said to consider linking copper tax rate to investments

- Ukraine Parliamentary speaker Hroiman: Country entering a serious political crisis

- China State Administration of Foreign Exchange (SAFE) confirms speculation that it eased QFII investment upper limit and shortened lockup period to 3 months from 1 year

- China released guidelines on steel industry capacity cut and; targets reduction between 100-150M tonnes in steel capacity over the next 5 years

Currencies

- The USD weakened over the past 24 hours with USD Index at 3-month lows after Fed member Dudley express concern that a stronger greenback would hurt the US. Markets were reassessing the number of Fed rate hikes in 2016; USD softer over the past 24 hours. Goldman Sachs revised its view on Feds next rate hike to June from March and lowered the total of Fed rate hikes seen in 2016 from 4 to 3. EUR/USD holding above the 1.11 level with some decent technical tailwinds for several more big figures higher. USD/JPY pair was back below the level when the BOJ eased IOFER into negative territory. Pair probing 117.50 just ahead of the NY morning.

- BOE in focus: Policy expected to remain on hold, but the inflation report to clarify central bank's assessment of developments in oil prices and the outlook for the world economy. Particular attention will be paid to the vote and whether hawk McCafferty comes back into the majority. GBP/USD trading at 1.4660 ahead of the NY morning.

**Fixed Income:

-Bund futures trade at 163.43 down 60ticks after pulling back from contract highs at 164.22 seen yesterday, following a rebound in stocks. Following the break of 164 yesterday analysts eye a break of 164.22 to target 164.44 with follow through targetting 164.90 . Support remains at 163.29 followed by 163.08 gap fill with a break seeing 162.70 then 162.28 and 162.01, with 161.55 seen capping the move.

- Gilt futures trade at 120.28 down 61 ticks following a rebound in stocks and ahead of the the BoE rate decision and inflation report. Futures traded contract highs at 121.14 before retracing with a move back above targeting 121.50 then 121.98. Support remains at 120.02 with a break seeing 119.76 initially followed by 119.58 with 119.34 to fill the gap. A break targets 119.02 then 118.79.

- Thursday's liquidity report showed Wednesday's excess liquidity fell to €672.2B a fall of €3.4B from €675.6B prior. This was primarily due to reduced MRO take up which was countered by AFs and MonPol portfolios falling to negative €259.0B the lowest on record. AFs are negative when the MonPol portfolios exceeds the liquidity absorbing effect of AFs. Use of the marginal lending facility rose to €266M from a prior €33M.

- Corporate issuance saw $6B come to market marking the buesiest day of the Month so far. Issuance was highlighted by a $3B multi tranche offering from Home depot as the rebound is Equities helped lift sentiment. Issuance for the week has estimates ranging from roughly $20-25B for the week, with estimates for the month seen at around $85-100B.

**Political/In the Papers:

- (DE) German Fin Min Schaeuble: Difficult for Greece to solve its problems without a currency devaluation. Told former Greece Fin Min Venizelos back in 2011 to consider a Grexit for some years in return for massive help

- (IR) Venezuela, Russia, and Iran, together with 3 other oil producing countries are in agreement that an emergency meeting should be held

Looking Ahead

- (EU) EU Defense Ministers begin 2-day meeting in Amsterdam

- 05:30 (HU) Hungary Debt Agency (AKK) to sell Bonds

- 05:30 (PL) Poland to sell Bonds

- 06:00 (CZ) Czech Republic sells 9-month Bills

- 06:00 (IE) Ireland Jan Live Register Monthly Change: No est v -1.8k prior; Live Register Level: No est v 328.6K prior

- 06:00 (BR) Brazil CONAB corp report

- 06:00 (ZA) South Africa Dec Electricity Consumption Y/Y: No est v -2.4% prior; Electricity Production Y/Y: No est v -1.5% prior

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

- 07:00 (UK) Bank of England (BOE) Jan Minutes

- 07:00 (UK) Bank of England (BOE) Quarterly Inflation Report (QIR)

- 07:00 (CZ) Czech Central Bank Interest Rate Decision: expected to leave both Repurchase Rate and EUR/CZK currency floor unchanged at 0.05% and around 27.00 respectively

- 07:00 (LX) ECBs Mersch (Luxembourg) in Zurich

- 07:30 (US) Jan Challenger Job Cuts: No est v 23.6K prior; Y/Y: No est v -27.6% prior

- 07:30 (UK) BOE Gov Carney press conference

- 08:00 (RU) Russia Gold and Forex Reserve w/e Jan 29th: No est v $369.3B prior

- 08:15 (US) Baltic Dry Bulk Index

- 08:15 (CZ) Czech Central Bank Gov Singer to hold post Rate Decision press conference

- 08:30 (US) Q4 Preliminary Nonfarm Productivity: -2.0%e v +2.2% prior; Unit Labor Costs: 4.1%e v 1.8% prior

- 08:30 (US) Initial Jobless Claims: 277Ke v 278K prior; Continuing Claims: 2.24Me v 2.268M prior

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

- 08:30 (US) Feds Kaplan in Dallas on global economy

- 09:00 (MX) Mexico Nov Gross Fixed Investment : 0.5%e v 1.0% prior

- 09:00 (BR) Brazil to sell 2022 LFT

- 09:00 (BE) Brazil to sell 2016, 2018 and 2020 Bills

- 10:00 (US) Dec Factory Orders: -2.8%e v -0.2% prior; Orders Ex-Transportation: No est v -0.3% prior

- 10:00 (US) Dec Final Durable Goods Orders: -4.5%e v %-5.1 prelim; Durables Ex Transportation: No est v -1.2% prelim; Capital Goods Orders (Non-defense/Ex-aircraft): No est v -4.3% prelim; Capital Goods Shipments (Non-defense/Ex-aircraft): No est v -0.2% prelim: Ex-Defense: No est v -2.9% prelim

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

- 14:00 (MX) Mexico Central Bank (Banxico) Interest Rate Decision: Expected to leave Overnight Rate unchanged at 3.25%

- 14:00 (CO) Colombia Jan PPI Domestic M/M: No est v 1.8% prior; PPI Total M/M: No est v 1.5% prior

- 14:00 (CO) Colombia Dec Exports: $2.4Be v $2.4B prior

- 17:00 (US) Feds Mester

- 19:30 (TW) Taiwan Jan CPI Y/Y: 0.8%e v 0.1% prior; WPI Y/Y: -5.1%e v -7.1% prior

- 19:30 (AU) Australia Dec Retail Sales M/M: No est v 0.4% prior; Retail Sales Ex Inflation Q/Q: No est v 0.6% prior

- 19:30 (AU) RBA Statement on Monetary Policy

- 20:00 (PH) Philippines Jan CPI M/M: 0.2%e v 0.2% prior; Y/Y: 1.4%e v 1.5% prior; CPI Core Y/Y: 2.2%e v 2.1% prior

- 21:00 (ID) Indonesia Q4 GDP Q/Q: -1.9%e v +3.2% prior; Y/Y: 4.8%e v 4.7% prior; Overall 2015 Annual GDP Y/Y: 4.7%e v 5.0% prior

- 22:30 (HK) Hong Kong to sell 3-month, 6-month Bills

- 23:00 (MY) Malaysia Dec Trade Balance (MYR): 9.7Be v 10.2B prior; Exports Y/Y: 4.9%e v 6.3% prior; Imports Y/Y: 4.3%e v 9.1% prior