German coalition talks appear to be moving forward; Euro hits 3-year highs

Notes/Observations

- Germany said to be inching closer for a grand coalition govt

- Euro at 3-year highs above the 1.21 level; aided by perception that ECB QE operations will probably end in September

- Focus turns to US Dec CPI and its impact on the rate outlook

Asia:

- China Dec Trade Balance registered its highest monthly surplus since Jan 2016 ($54.7B v 37.0Be); Imports slump (4.5% v 15.1%e)

- China Customs Official Huang Songping Comments on Trade: China Trade outlook ‘upbeat' in 2018; will be difficult to maintain double digit trade growth in 2018

- China Communist Party Central Committee Plenary to be held Jan 18-19th (**Note: expected to discussion revisions to its constitution)

- Japan Econ Min Motegi: Can't rely on only one economic indicator when deciding whether to declare end of deflation

Europe:

- Negotiations said to continue on trying to form a German coalition govt; no agreement yet. Merkel's CDU and CSU negotiate with SPD through the night to resolve differences on taxes, migration and other issues

- PM May reportedly told bankers that their industry is a priority for her in Brexit talks; conclusion of talks were deemed to have provided reassurance to financiers. Bankers asked for as much certainty as possible about future regulatory relationship between the UK, EU

Americas:

- Fed's Dudley (dove, FOMC voter): worried growth overheating is a real risk in the next few years; Fed may have to press harder on the brakes at some point. Fed forecast for 3 rate hikes this year is a reasonable starting point

- US Commerce Sec Ross: Submitted results of probe into national security impact of steel imports; President Trump now has 90-days to decide on any potential action

- White House expected to extend sanctions relief to Iran with formal announcement expected at mid-morning on Friday (**Note: Congress requires the administration certify Iran's compliance with the nuclear deal (JCPOA) every 90 days. The next certification is due on Friday, Jan 12th)

Economic Data:

- (RO) Romania Dec CPI M/M: 0.3% v 0.3%e; Y/Y: 3.3% v 3.4%e

- (RO) Romania Q3 Final GDP Q/Q: 2.6% v 2.6% prelim; Y/Y: 8,8% v 8.8% prelim

- (TR) Turkey Nov Current Account Balance (TRY): -4.2B v -3.9Be

- (FR) France Dec Final CPI M/M: 0.3% v 0.3%e; Y/Y: 1.2% v 1.2%e; CPI Ex-Tobacco Index: 101.76 v 101.80e

- (FR) France Dec Final CPI EU Harmonized M/M: 0.4% v 0.4%e; Y/Y: 1.2% v 1.3%e

- (ES) Spain Dec Final CPI M/M: 0.0% v 0.1%e; Y/Y: 1.1% v 1.2%e

- (ES) Spain Dec Final CPI EU Harmonized M/M: 0.0% v 0.1%e; Y/Y: 1.2% v 1.3%e

- (HU) Hungary Dec CPI M/M: 0.0% v 0.1%e; Y/Y: 2.1% v 2.2%e

- (CN) China Dec M2 Money Supply Y/Y: 8.2% v 9.2%e; M1 Money Supply Y/Y: 11.8% v 12.6%e , M0 Money Supply Y/Y: 3.4% v 5.9%

- (CN) China Dec Aggregate Financing (CNY): 1.140T v 1.500Te

- (CN) China Dec New Yuan Loans (CNY): 584.4B v 1.000Te

- (SE) Sweden Dec CPI M/M: 0.4% v 0.4%e; Y/Y: 1.7% v 1.8%e

- (SE) Sweden Dec CPIF M/M: 0.4% v 0.4%e; Y/Y: 1.9% v 1.9%e, CPI Level: 325.23 v 325.39e

- (IT) Italy Nov Industrial Production M/M: 0.0% v 0.6%e; Y/Y: 2.2% v 6.3% prior; Industrial Production WDA Y/Y: 2.2% v 3.3%e

- (GR) Greece Dec CPI Y/Y: % v 1.1% prior; CPI EU Harmonized Y/Y: % v 1.1% prior

**Fixed Income Issuance:

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx600 flat at 397.40 , FTSE +0.1% at 7772 , DAX +0.1% at 13219, CAC-40 +0.1 at 5492 , IBEX-35 +0.4 at 10472, FTSE MIB 0.5% at 23417 , SMI +0.3 at 9529, S&P 500 Futures +0.2%]

Market Focal Points/Key Themes: European Indices trade flat to slightly higher across the board following on from another record close in Wallstreet overnight, and a higher indicated open this morning. On the corporate front shares of Puma was in focus after Kering confirmed proposal to distribute PUMA shares to shareholders. In the UK GKN trades sharply higher after rejecting a proposal from Melrose as well as appointing a new CEO; B&M, Mitchel & Butlers and Bovis Homes were among other names providing updates. In France Vivendi has bounced off lows following their Q4 guidance and affirmed outlook. Looking ahead US banking giants JP Morgan and Wells Fargo will be kicking off earnings season, with other earners including PNC bank and Blackrock.

Movers

-Consumer Discretionary [ Kering [KER.UK] -1.5%, Puma [PUM.DE] -5.5% (Confirms proposal to distribute PUMA shares to Kering shareholders through a distribution in kind), Mitchell & Butler [MAB.UK] +2.8% (Christmas update), B&M [BME.UK] +2.1% (Earnings), Vivendi [VIV.FR] -1.2% (prelim Q4)]

-Consumer Staples [CHR Hansen [CHR.DK] -6% (Earnings)]

-Industrials [ GKN [GKN.UK] +27% (Rejects acquisition proposal from Melrose Plc), Kone [KNEBV.FI] -1.8% (Earnings)]

-Healthcare [Covestro [1COV.DE] -1.2% (Bayer divests further stake)] -Real Estate [Bovis [BVS.UK] +2.7% (Trading update)]

***Equities***

Speakers

- German coalition negotiations said to have achieved a breakthrough; still working on a final deal to negotiate a coalition govt. Merkel and SPD do not plan any tax increase

- German Chancellor Merkel: Optimistic that things will move forward

- German SPD leader Schulz: Have agreed unanimously on a deal; recommends Social Democrats' Party Convention to back Preliminary deal

- German CSU pary's Seehofer: Highly satisfied with results of talks; parties want new government before Easter

- German Economic Ministry Monthly Report: Exports were expected to continue to expand. Consumer spending could benefit from rising wages

- France Fin Min Le Maire said to rule out a new tax to pay for cut in residence levy

- Sweden Central Bank (Riksbank) Dep Gov Skingsley: Changing policy too soon would be risky (in-line with Dec minutes). Strong economy suggests that stable development in inflation. Needed to be careful when tightening did begin; possible to begin tightening before the ECB (in-line with Gov Ingves view). Best to cut the balance sheet after the exit from negative interest rates

- Italy SWG Election Poll: Center-right Bloc (led by Berlusconi Forza Italia party) at 37.6% from 35.2% prior poll. The Ruling Democratic Party (PD): 23.1% v 25.0% prior and Five-Star Movement: 26.7% v 25.7% prior . The Center-left coalition (including PD): 27.1% v 29.3% prior

- China PBoC official: Monetary and credit conditions were normal (**Note: Comments after softer M2 Money Supply and New Yuan Loan data)

Currencies

- USD was on soft footing against the major and commodity-related pairs with focus turning to the upcoming US Dec CPI data and its impact on the rate outlook. The greenback turned softer on Thursday after disappoint PPI data.

- EUR/USD hits 3-year highs in the session above the 1.2100 level in the aftermath of the more perceived hawkish ECB Minutes from December that seemed to suggest that QE operations will probably end in September. Euro also receiving a boost as negotiations to put together a Grand German coalition was optimistic after reports of a ‘breakthrough' in talks.

- GBP/USD moved above the pivotal 1.36 level on the back of overall USD weakness. The 1.36 area has been a key technical resistance area in the aftermath of the GBP descent following the Brexit referendum in Jun 2016 - USD/CAD off its recent highs as the pair moved toward the lower end of the 1.25 handle as the CAD currency recovered as rate hike prospects outweigh NAFTA fears (**Note: Bank of Canada decision due next Wed)

Fixed Income

- Bund Futures trades down 14 ticks at 160.37 as German coalition negotiations said to have achieved a breakthrough. Continued upside targets 162.00, while a move lower targets the159.56 low.

- Gilt futures trade at 123.79 down 15 ticks trading in sympathy with Bunds and US treasuries. Support continues to stand at 123.55 then 122.83, with upside resistance at 124.25 then 124.96.

-Friday's liquidity report showed Thursday's excess liquidity rose to €1.869T from €1.865T prior. Use of the marginal lending facility fell to €154M from €176M prior.

- Corporate issuance saw three names come to market raising $7B in the primary market. Lipper reports equity fund inflows of $4.2B in week ending Jan 10th. High yield funds saw inflows of $2.65B in the week.

Looking Ahead

- (RU) Russia Narrow Money Supply w/e Jan 5th: No est v 9.64T prior

- 06:00 (BR) Brazil Nov IBGE Services Sector Volume Y/Y: -1.2%e v -0.3% prior

- 06:00 (UK) DMO to sell combined £3.0B in 1-month, 3-month and 6-month Bills (£0.5, £0.5B and £2.0B respectively)

- 06:30 (IN) India Weekly Forex Reserves

- 06:45 (US) Daily Libor Fixing

- 07:00 (IN) India Dec CPI Y/Y: 5.1%e v 4.9% prior

- 07:00 (IN) India Nov Industrial Production Y/Y: 4.1%e v 2.2% prior

- 08:00 (IN) India announces upcoming Bill auction (held on Wed)

- 08:00 (ES) Spain Debt Agency (Tesoro) announces upcoming issuance

- 08:05 (UK) Baltic Dry Bulk Index

- 08:30 (US) Dec CPI M/M: 0.1%e v 0.4% prior; Y/Y: 2.1%e v 2.2% prior

- 08:30 (US) Dec CPI Ex Food and Energy M/M: 0.2%e v 0.1% prior; Y/Y: 1.7%e v 1.7% prior

- 08:30 (US) Dec CPI Index NSA: 246.372e v 246.669 prior; CPI Core Index SA: 254.333e v 253.724 prior

- 08:30 (US) Dec Advance Retail Sales M/M: 0.5%e v 0.8% prior; Retail Sales Ex Auto M/M: 0.4%e v 1.0% prior, Retail Sales Ex Auto and Gas: 0.4%e v 0.8% prior, Retail Sales Control Group: %0.4e v 0.8% prior

- 08:30 (US) Dec Real Avg Weekly Earnings Y/Y: No est v 0.8% prior; Real Avg Hourly Earning Y/Y: No est v 0.2% prior 08:30 (CA) Canada Dec Teranet House Price Index M/M: No est v -0.5% prior; Y/Y: No est v 9.2% prior; HPI Index: No est v 217.1 prior

- 09:00 (MX) Mexico Oct Gross Fixed Investment: -0.1%e v -2.6% prior

- 10:00 (US) Nov Business Inventories: +0.4%e v -0.1% prior

- 11:30 (DE) ECB's Weidmann (Germany)

- 11:00 (EU) Potential sovereign ratings after European close: S&P on Belgium; Fitch on Romania

- 12:00 (US) USDA World Agricultural Supply and Demand Estimate (WASDE) Crop Report

- 12:00 (US) Fed's Harket (non-voter, hawk) on economic outlook

- 13:00 (US) Weekly Baker Hughes Rig

- 16:15 (US) Fed's Rosengren (non-voter, hawk) speech in San Diego