UK downplays hard Brexit concerns

Notes/Observations

- UK govt official plays down concerns over hard brexit scenario; GBP currency was edging back towards Oct 'flash crash' level during Asian session

- US policy uncertainty lingers ahead of President-elect Donald Trump's Friday inauguration; protectionist stance contributes risk aversion

Overnight:

Asia:

- President-elect Trump: Not looking to declare China a currency manipulator but also not commit to One China policy unless progress was seen on FX and trade issues

- Bank of Japan (BOJ) Gov Kuroda reiterated that would adjust monetary policy if needed; CPI to remain slightly negative for time being. Reiterated to maintain QQE with yield control as long as needed to achieve 2% inflation in stable manner.

- BOJ Quarterly Regional Report (Sakura) on Economies of Domestic Regions raised its economic assessment for 3 of 9 regions . Most areas were seeing a moderate economic recovery.

Europe:

- PM May to deliver a speech on Tuesday, Jan 17th calling for "clean and hard Brexit"; to show willingness to give up single market membership

- PM May's Article 50 trigger plans could be delayed by two months while the Northern Ireland Assembly was not in session due to snap elections

- UK Treasury to speak with banks following PM May's speech on Tuesday to help reassure investors

- EU's Regling: Appears we are headed for "hard Brexit"

Americas:

- President-elect Trump stated that the Brexit was great, other EU states should follow; UK voted for Brexit because Britons wanted own identity. To invite UK PM May to visit him right after taking office

Economic data

- (JP) Japan Dec Preliminary Machine Tool Orders Y/Y: +4.4% v -5.6% prior

- (IN) Dec Wholesale Prices (WPI) Y/Y: 3.4% v 3.5%e

- (TR) Turkey Dec Central Gov't Budget Balance (TRY): -27.0B v +10.0B prior (largest Dec deficit on record)

- (CZ) Czech Dec PPI Industrial M/M: 0.5% v 0.4%e; Y/Y: -0.4% v -0.5%e

- (DK) Denmark Dec PPI M/M: 0.6% v 1.6% prior; Y/Y: 3.2% v 2.4% prior

- (IT) Italy Dec Final CPI M/M: 0.4% v 0.4% prelim; Y/Y: 0.5% v 0.5% prelim

- (MX) Mexico Dec Total Formal Job Creation: -319.2K v +137.9K prior

- (EU) Euro Zone Nov Trade Balance (Seasonally Adj): €20.8Be v €19.7B prior; Trade Balance NSA (Unadj): €24.3Be v €20.1B prior

**Fixed Income Issuance:

- None seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

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

Indices [Stoxx50 -0.5% at 3,304, FTSE flat at 7,338, DAX -0.6% at 11,566, CAC-40 -0.5% at 4,896, IBEX-35 -0.9% at 9,425, FTSE MIB -1.1% at 19,303, SMI -0.7% at 8,390, S&P 500 Futures -0.2%]

Market Focal Points/Key Themes: European equity indices are trading lower after a generally lower end to the Asian session overnight, as UK PM Teresa Mays scheduled speech on Tuesday is expected to signal a clean and hard Brexit; Banking stocks weighting heavy on most of the major indices; shares of Essilor the notable double-digit gainer in the Eurostoxx after confirming a merger agreement with Luxottica; shares of Luxottica also trading notably higher in the FTSE MIB; Homebuilder stocks trading notably lower in the FTSE 100; Commodity and mining stocks trading generally higher in the index as copper consolidates near its yearly highs. No upcoming scheduled US earnings (pre-market) today.

Equities (as of 09:50 GMT)

- Consumer Discretionary: [Essilor EI.FR +13.5% (merger agreement with Luxottica), Hugo Boss BOSS.DE +8.1% (prelim Q4 sales), Caverion CAV1V.FI -4.7% (prelim FY16 results), Hennes & Mauritz HMB.SE -2.4% (Dec sales), Luxottica LUX.IT +8.4% (Confirms merger agreement with Essilor; analyst upgrade)]

- Energy: [Aker BP AKERBP.NO -1.3% (initial FY17 production)]

- Financials: [Ashmore Group ASHM.UK +3.1% (Q2 AUM)]

- Industrials: [Atlas Copco ATCOA.SE +0.5% (Board proposes to split group into two listed companies in 2018)]

- Materials: [Ibstock IBST.UK -2.4% (trading update)]

Speakers

- ECB's Villeroy (France) reiterated ECB view that concerns about inflation returning is greatly exaggerated

- German Bundesbank said to be buying govt bonds with yield below the -0.40% level for 1st time

- Spokeswoman for PM May: talk of a hard Brexit was speculation

- Spain Dep PM Saenz reiterated view that Catalan referendum will not occur in 2017

- Turkey Fin Min Agbal stated that it would achieve 2017 budget deficit to GDP target and sa no need for any additional tax regulation at this time. Central Bank to take necessary measures as it had instrumental independence

- Turkey Presidential advisor Gedikli: Central Bank should NOT raise interest rates. Saw attempts by speculators to force the central bank into a large rate hik

- Turkey Dep PM Kurtulmus: No structural issue behind weakness of the TRY currency (Lira); FX action result of political manipulation. Exchange rate may normalize over the next few weeks

- Russia govt spokesperson Peskov declined to say whether US would be invited to Syria talk; would wait until Trump took office before commenting on plans. Would not raise sanction relief in talks with US or others and added that Russia was not making preparations for any possible Putin-Trump meeting

- Brazil Fin Min Meirelles said to see Q1 GDP growth as solid monetary easing based on inflation slowdown to lead country back to growth

- Japan pension fund GPIF President Takahashi stated that it would not disclose ESG Index until summer to minimize impact on stocks

- Saudi Energy Min al Falih: Not necessary to extend OPEC production cut agreement; oil market to rebalance by H1 2017 due to level of compliance and demand

- Iran Oil Min Zanganeh reiterated confidence that both OPEC and non-OPEC members would commit to the production output cut

Currencies

- The GBP was broadly softer towards 3-month lows during the Asian and early European sessions as UK press reports hinted that PM May's Tuesday speech likely to lay the groundwork for a "clean and hard Brexit". GBP/USD dipped below the 1.20 level in late Asia. UK Treasury planned to speak with banks about measures to reassure investors. US President-elect Trump promised to offer UK a quick and fair trade deal. Complicating matters for the UK was the speculation that Northern Ireland was heading towards new elections and this could delay the planned trigger of Article 50 thus raising economic uncertainty even more. The GBP was off its worst levels after a UK govt spokesperson noted that talk of a hard Brexit was speculation. The GBP/USD pair was around 1.2050 just ahead of the NY morning.

- JPY currency (Yen) benefited from the spat of risk aversion stemming from the 'hard Brexit' concerns with USD/JPY initially heading towards the mid-113 neighborhood. Pair back above the 114 handle mid-session.

- EUR/USD softer by 0.5% and back below the 1.06 level. Dealers noted that German Bundesbank was buying govt bonds with yield below the -0.40% Deposit Rate level for 1st time

**Fixed Income:

- Bund futures trade at 163.61 up 20 ticks in quiet trade as US cash markets are closed in observance of MLK Holiday. Resistance remains at 164.19 then 164.52 followed by 164.94 2017 high. Support moves to 163.14 then 162.92 followed by 162.47.

- Gilt futures trade at 124.82 up 35 ticks off session highs of 125.10 after Hard Brexit talks over the weekend by PM May ahead of her speech on Tuesday gave Bonds a lift. A take out of highs target 125.30 then 125.51 followed by 125.83 year high. Support moves to 124.26 followed by 123.86. Short Sterling futures trade flat to 2bp higher with Jun17Jun18 trading at 15bp choice.

- Monday's liquidity report showed Friday's excess liquidity fell to €1.279T a fall of €1B from €1.280T prior. This was primarily due to AFs and MonPol portfolios rising to negative €807.6B. AFs are negative when the MonPol portfolios exceeds the liquidity absorbing effect of AFs. Use of the marginal lending facility rose to €175M from €149M prior.

- Corporate issuance saw $36.3B come to market last week via 37 tranches bringing YTD issuance to $91.3B in what was another active week. The week was highlighted by Broadcom $13.55B offering in a 4 part issuance. Looking ahead JpMorgan, Wells Wargo could come to market following their earnings on Friday.
European issuance was strong lead by SSA issuance including Portugal and EFSF as €51.9B came to market ahead of the €30B estimate. Issuance peaked on Tuesday with €15.3B priced.

Looking Ahead

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

- 05:30 (NL) Netherlands Debt Agency (DSTA) to sell combined €2.0-4.0B in 3-month and 6-month Bills

- 05:30 (PL) Poland to sell Bills - 06:00 (IS) Israel Q3 Final GDP Annualized: No est v 3.4% prelim

- 06:00 (IE) Ireland Nov Property Prices M/M: No est v 0.8% prior; Y/Y: No est v 7.1% prior - 06:45 (US) Daily Libor Fixing

- 08:00 (RU) Russia Nov Trade Balance: $7.4Be v $6.6B prior, Exports: $25.6Be v $24.9B prior, Imports: $17.5Be v $18.3B prior

- 08:00 (RU) Russia Dec Official Reserve Assets: $381.0Be v $385.3B prior

- 08:00 (PL) Poland Dec CPI Core M/M: 0.1%e v 0.0% prior; Y/Y: 0.0%e v -0.1% prior

- 08:00 (ES) Spain Debt Agency (Tesoro) announces size of upcoming auctions iduring week - 08:15 (UK) Baltic Dry Bulk Index

- 08:50 (FR) France Debt Agency (AFT) to sell €5.2-6.4B in 3-month, 6-month and 12-month Bills

- 09:00 (BE) Belgium Nov Trade Balance: No est v €0.2B prior

- 09:00 (CA) Canada Dec Existing Home Sales M/M: No est v -5.3% prior

- 09:00 (US) IMF updates its Work Economic Outlook (WEO)

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

- 09:35 (EU) ECB calls for bids in 7-Day Main Refinancing Tender

- 09:50 (UK) Bank of England Bond Buying Operation (APF Gilt purchase operation between 3-7 years)

- 11:00 (IS) Iceland Dec International Reserves (ISK): No est v 806B prior

- 13:30 (UK) BOE Gov Carney speaks at London School of Economics

- 16:00 (NZ) New Zealand NZIER Business Opinion Survey

- 17:30 (AU) Australia ANZ Roy Morgan Weekly Consumer Confidence Index

- 19:30 (AU) Australia Nov Home Loans M/M: No est v -0.8% prior

- 19:30 (AU) Australia Dec New Motor Vehicle Sales M/M: No est v -0.6% prior; Y/Y: No est v -1.1% prior

- 19:30 (SG) Singapore Dec Non-oil Domestic Exports M/M: No est v 13.1% prior; Y/Y: No est v 11.5% prior, Electronic Exports Y/Y: No est v 3.5% prior

- 22:00 (TH) Thailand Central Bank to sell THB90B in 3-month, 6-month Bills

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

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

- 23:30 (JP) Japan Nov Final Industrial Production M/M: No est v 1.5% prelim; Y/Y: No est v 4.6% prelim, Capacity Utilization M/M: No est v 1.4% prior