Hard-Brexit scenario back into play

**Notes/Observations**

- Hard-Brexit scenario back into play; GBP at multi-month lows against major pairs

- Euro Zone Jan confidence data continue string of improving sentiment in regions

 

Overnight:

Asia:

- China Dec Foreign Reserves decline for its 6th straight month to lowest level in 6 years ($3.011T v $3.052T prior; for all 2016 reserves decline by nearly $320B as yuan currency weakened

- PBoC advisor Fan Gang: Policymakers unlikely to move further on curbing outflows, not likely to drop intervention. Declining foreign reserves was a positive in the long term. China needed less reserves after the Yuan inclusion in SDR FX basket.

Europe:

- Germany's Social Democrats (SPD) party's Gabriel to run for German Chancellorship in Sept election; did not want a new edition of current grand coalition

- PM May reiterated that Britain would leave the single market and was not interested in retaining elements of EU membership; Would set out plan for Britain including right deal for Brexit over coming weeks

Americas

- Fed's Evans: (2017 voter) Two Fed rate hikes in 2017 is not unreasonable expectation; three hikes is 'not implausible'

- Fed's Williams (moderate, non-voter): Strong jobs data means that short-term fiscal stimulus is not needed

- Fed's Lacker (hawk, non-voter): inflation, jobs and fiscal outlook support case for raising rates; Fed's interest rate target is 'exceptionally low'

 

Economic data

- (DE) Germany Nov Industrial Production M/M: 0.4% v 0.6%e; Y/Y: 2.2% v 1.9%e

- (DE) Germany Nov Current Account: €24.6B v €22.1Be; Trade Balance: €22.6B v €20.3Be, Exports M/M: +3.9% v +0.5%e, Imports M/M: +3.5% v +1.1%e

- (FR) Bank of France Dec Business Sentiment (beat): 102 v 101e

- (TW) Taiwan Dec Trade Balance (beat): $4.9B v $4.4Be, Exports Y/Y: 14.0% v 10.4%e, Imports Y/Y: 13.2% v 10.0%e

- (CZ) Czech Dec Unemployment Rate: 5.2% v 5.2%e

- (UK) Dec Halifax House Prices (beat) M/M: 1.7% v 0.3%e; 3M/Y: 6.5% v 5.8%e

- (IT) Italy Nov Preliminary Unemployment Rate: 11.9% v 11.6%e

- (CH) SNB Total Sight Deposits for Week Ended Jan 6th (CHF): 529.7B v 529.0B prior

- (IS) Iceland Dec Preliminary Trade Balance (ISK): -4.4B v -11.7B prior

- (SG) Singapore Dec Foreign Reserves: $246.6B v $247.8B prior

- (EU) Euro Zone Jan Sentix Investor Confidence (beat): 18.2 v 12.8e

- (EU) Euro Zone Nov Unemployment Rate: 9.8% v 9.8%e (matches lowest level since Sept 2011)

**Fixed Income Issuance:

- None seen ***

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM ***

**Index snapshot (as of 10:00 GMT)**

Indices [Stoxx50 -0.4% at 3,307, FTSE +0.2% at 7,226, DAX -0.4% at 11,556, CAC-40 -0.6% at 4,883, IBEX-35 -0.4% at 9,482, FTSE MIB -0.5% at 19,599, SMI -0.1% at 8,406, S&P 500 Futures flat]

Market Focal Points/Key Themes: European equity indices are trading generally lower despite a positive end to the Chinese markets and a mixed Asian session overnight; FTSE 100 notably outperforming led by commodity and mining stocks despite oil and copper prices trading sharply lower intraday; shares of Glencore the notable gainer after Barclays resumed with overweight analyst action; Banking stocks trading generally lower across the board, with peripheral lenders mixed in the FTSE MIB.

Upcoming scheduled US earnings (pre-market) include Acuity Brands, Commercial Metals, and Global Payments.

 

Equities (as of 09:50 GMT)

- Consumer Discretionary: [Air France AF.FR -1.2% (Dec metrics), Bovis Homes BVS.UK +1.9% (CEO to step down), Continental CON.DE -0.9% (prelim FY16 results), William Hill WMH.UK -3.7% (prelim FY16 results)]

- Energy: [Petrofac PFC.UK +3.1% ($600M contract award)]

- Financials: [Panmure Gordon PMR.UK +3.3% (trading update)]

- Healthcare: [Addex Therapeutics ADXN.CH +0.4% (ADX71441 demonstrates statistically significant efficacy), Celyad CYAD.BE +2.4% (USPTO upholds patent for production of Allogeneic TCR-Deficient CAR-T Cells), EKF Diagnostics EKF.UK +8.0% (trading update), Innate Pharma IPH.FR +0.1% ($15M milestone payment)]

- Industrials: [Fiat Chrysler FCA.IT +2.8% (Announces $1B investment in plants in Michigan and Ohio; to add 2,000 jobs)]

- Materials: [Centamin CEY.UK +0.8% (prelim Q4 production), Ferrexpo FXPO.UK +4.3% (Q4 pellet production), Glencore GLEN.UK +2.4% (analyst upgrade)]

- Technology: [Dialog Semiconductor DLG.DE +0.8% (prelim Q4 results)]

 

Speakers

- Norway PM Solberg: Oil industry employment will not return to levels seen in 2014

- Turkey Dep PM Canikli: Constitutional referendum could be held in early April

- China govt said to be considering relaxing curbs on stock-index futures trading with measures being considered include halving the amount of deposits, or guaranteeing fees, and doubling the maximum limit on daily trading volume of a single contract

- China Commerce Ministry (MOFCOM) presented its 5-year trade plan for foreign trade development and noted it would implement an active imports policy

- China Foreign Ministry official Lu Kang reiterated US should follow one-China policy and again expressed dissatisfaction with US officials talking with Taiwan's leadership

- Russia reportedly cuts its Jan oil production from 11.25M bpd to 11.1M bpd

 

Currencies

- The GBP currency was weaker in the session and hitting 10-week lows after PM May signaled Britain would leave the single market and was not interested in retaining elements of EU membership. Dealers took the signal that a hard-Brexit scenario was back into play. GBP/USD tested 1.2125 while EUR/GBP croos rose to 0.8680 area

- The USD was quiet among the other major pairs in listless trading. EUR/USD was hovering around the 1.0530 area while USD/JPY was steady just under the 117 level.

- The Turkish Lira continue to hit record lows against the USD with the pair moving beyond the 3.71 level. Dealers continued to speculate whether the Turkey Central bank would defy govt warnings of hiking interest rates. Lira was weaker by almost 2% in todays session and already down over 5% in the 1st six trading days of the New Year. Turkish parliament began debating on constitutional amendment bill today.

**Fixed Income:

- Bund futures trade at 162.88 up 4 ticks reversing earlier losses as Equities turn lower. Support lies at 162.67 initially followed by 162.24. Resistance moves to 163.23 followed by 163.76 then 164.52.

- Gilt futures trade at 124.64 up 31 ticks outperforming on overnight comment from PM May reiterating Britain will leave the EU single market and was not interested in retaining elements of membership. Continued upside targets 125.13 initially then 125.35 followed by 125.51. A move lower to 124.18 paves the way to 123.86. Short Sterling futures trade flat to up 1bp with Jun17Jun18 trading at 16/17bp.

- Monday's liquidity report showed Friday's excess liquidity rose to €1.250T a rise of €3B from €1.247T prior. This was primarily due to AFs and MonPol portfolios falling to negative €778.3B. AFs are negative when the MonPol portfolios exceeds the liquidity absorbing effect of AFs. Use of the marginal lending facility fell to €249M from €374M prior.

- Corporate issuance saw total volume for last week at ~$55B via 63 tranches in an active first week. For the week ahead analysts expect issuance to slow to around $25-30B. For Euro denominated issuance last week saw ~€45B come to market led by financials, which accounted for just under half of the weeks issuance. This morning saw a raft of corporate issuance continuing the strong showing seen last week, names include Commerzbank, Heidelberg Cement and Credit Agricole.

 

Looking Ahead

- (UK) Commons reconvenes after Christmas Recess

- (IL) Israel Central Bank (BOI) Dec Minutes

- (RU) Russia Dec Sovereign Wealth Fund Balances: Reserve Fund: No est v $31.3B prior; Wellbeing Fund: No est v $71.3B prior

- (MX) Mexico Dec Vehicle Production: No est v 296.3K prior; Vehicle Exports: No est v 245.3K prior AMIA Industry group

- 05:25 (BR) Brazil Central Bank Weekly Economists Survey

- 05:30 (PL) Poland to sell 1-month Bills

- 6:00 (PT) Portugal Nov Trade Balance: No est v -€0.9B prior

- 6:30 (CL) Chile Dec Trade Balance: $0.5Be v $0.0B prior, Total Exports: $5.9Be v $5.1B prior, Total Imports: $5.2Be v $5.1B prior, Copper Exports: No est v $2.4B prior

- 6:30 (CL) Chile Dec International Reserves: No est v $39.4B prior

- 06:45 (US) Daily Libor Fixing - 8:00 (RU) Russia Q4 Preliminary Current Account: No est v $0.4B prior

- 08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming actions in week (if any)

- 08:15 (UK) Baltic Dry Bulk Index

- 08:50 (FR) France Debt Agency (AFT) to sell €5.5-6.7B in 3-month, 6-month and 12-month Bills

- 09:00 (MX) Mexico Dec CPI M/M: 0.5%e v 0.8% prior; Y/Y: 3.4%e v 3.3% prior; CPI Core M/M: 0.5%e v 0.2% prior

- 09:00 (US) Fed's Roesengren speaks in Hartford, Connecticut

- 09:00 (DE) German Chancellor Merkel

- 09:30 (EU) ECB announces weekly Bond Purchases

- 09:50 (UK) Bank of England (BOE) Bond Buying Operation

- 10:30 (CA) Bank of Canada (BoC) Q4 Senior Loan Officer Survey: No est v 3.3 prior; Business Outlook Future Sales: No est v 12 prior

- 11:30 (US) Treasury to sell 3-Month and 6-Month Bills

- 12:45 (US) Fed's Lockhart speaks to the Rotary Club of Atlanta

- 15:00 (US) Nov Consumer Credit: $18.4Be v $16.0B prior