Overnight Market Summary

Overnight one of the main stories is that the European Union has been downgraded to AA+ from AAA by S&P. While the market digests the impact of the downgrade, all eyes remain on the US treasury market. As Deutsche Bank notes, treasuries are increasingly being viewed as a potential sign of the success or not of the Fed taper in early 2014. From the lows in the immediate aftermath of Wednesday’s FOMC, 10yr UST yields have added more than 10bp. Yields continue to leak this morning (-2bp to 2.95%) though we’re still hovering at levels last seen in early September just before the Fed surprised markets with its non-taper. Despite this, US equities and credit were both reasonably well supported yesterday. However the combination of higher UST yields and a stronger dollar resulted in a fairly difficult day for EM. In EMFX, the Brazilian Real fell 1.1% against the USD, underperforming most other EM currencies. The move was exacerbated by the announcement from the BCB that it would wind back its intervention in the currency market, following the initial positive reaction to tapering on Wednesday. Other EM currencies also struggled including the TRY (-0.7%), MXN (-0.7%) and IDR (-0.3%). A number of EM equity markets struggled including in Poland (-0.7%) and Turkey (-3.5%).


Turning to Asian markets, the post-FOMC rally has paused in Asian equities with losses across the Nikkei (-0.4%) and Hang Seng (-0.5%) overnight. The focus is again on China where there is plenty of discussion on the squeeze in interbank funding markets. Following a spike in rates early yesterday, the PBoC acted late on Thursday to inject liquidity via short term operations which resulted in a sharp drop in short term rates. However, the relief has been shortlived, and the closely-watched Shanghai 7-day repo rate has once again spiked up (+170bp today to 6.90%). The repo rate is now higher than yesterday amid market talk of a missed payment at a local Chinese bank. This is something to monitor over the next few days as Chinese interbank rates typically fluctuate towards month/year end. The cautiousness in funding markets is weighing on Chinese equities today with the Shanghai Comp and HSCEI down by 1.0% apiece. Elsewhere, there were no major surprises from the BoJ meeting today and it appears that the central bank is content to wait for the impact of sales tax hikes in April 2014 before deciding on policy adjustments if any.


European equities remain on the front foot, on track for the third consecutive daily gain as markets continue to find solace in the Fed's non-aggressive QE taper. This brings the DAX into close proximity to all-time highs at 9424. Financials lead the way higher, as Italian and Spanish banks add to their recent gains, not perturbed by the looming Italian budget vote, wherein Letta's 2014 budget is expected to be passed through smoothly. GBP/USD has pulled back from near-YTD highs, as an upward revision to Y/Y GDP to 1.9% was countered by the biggest UK current account deficit on record, somewhat tarnishing S&P's decision this morning to affirm the UK at AAA. Another rise in Eurozone excess liquidity has failed to weaken the EUR, with all eyes looking ahead to the ECB's final LTRO repayment announcement of the year due after 1100GMT.


Finally, in the Asia-Pacific session, the Bank of Japan's decision to keep their monetary policy on hold provided no surprises, but the eradication of an option barrier in USD/JPY at 104.50 pushed the pair to five year highs at 104.59, albeit this was not sustained. Countering the positive equity sentiment are the Chinese indices, who mark the second day of losses as money markets in China constrict local stocks once more after the PBoC's decision yesterday to inject CNY 200bln was not enough to sate traders.


Looking at the day ahead, a number of US equity options and futures contracts expiries occur today. French business confidence, the Kansas City Fed manufacturing survey and the third estimate of US GDP are the data releases to note as we head into the final trading days before the Christmas break.


Overnight headline bulletin from RanSquawk and Bloomberg



  • European equities remain on the front foot, on track for the third consecutive daily gain as markets continue to find solace in the Fed's non-aggressive QE taper.

  • GBP/USD has pulled back from near-YTD highs, as an upward revision to Y/Y GDP to 1.9% was countered by the biggest UK current account deficit on record.

  • Finally, in the Asia-Pacific session, the Bank of Japan's decision to keep their monetary policy on hold provided no surprises, but the eradication of an option barrier in USD/JPY at 104.50 pushed the pair to five-year highs at 104.59.

  • Looking ahead there is the release of US GDP, which is expected to be unrevised. However, volatility is expected in the US indices as markets head through quadruple witching (expiration of index futures & options and single stock futures & options).

  • Treasury yield curves continue to flatten as 2Y-10Y maturities head for weekly loss after Fed announced $10b/month QE taper, strengthened forward guidance.

  • Fed will probably reduce its bond purchases in $10b increments over the next seven meetings before ending the program in December 2014, economists said

  • The Fed’s balance-sheet assets rose $14.1b in the week ended Dec. 18 to top $4 trillion for the first time, according to data released by central bank

  • The Bank of Japan kept its pledge to expand the monetary base by an annual 60t-70t yen ($670b) today after a two-day    meeting in Tokyo, in line with forecasts of all 35 economists surveyed by Bloomberg News

  • China’s money-market rates surged and stocks dropped for a ninth day, the longest losing streak in 19 years, as targeted fund injections by the central bank failed to alleviate the worst cash crunch since June

  • S&P cut its rating on the European Union to AA+ from AAA, citing the deteriorating creditworthiness of the bloc’s 28 member nations

  • A final confirmation vote on Janet Yellen to head the Fed was delayed until early January after the U.S. Senate dropped plans to consider her nomination this weekend

  • Americans whose health plans are being canceled because their coverage doesn’t meet Obamacare rules will be exempt from the mandate that they carry insurance, under a change announced by the Obama administration; insurers warn the new exemptions risk destabilizing the marketplace

  • Obama would veto Iran sanctions legislation introduced in the Senate yesterday, according to White House spokesman Jay Carney, who said the measure would increase chances for war

  • Sovereign yields decline. EU peripheral spreads little changed. Nikkei little changed while Shanghai falls 2%. European stocks mixed, U.S. equity index futures gain. WTI crude declines, gold and copper gain


Asian Headlines


The BoJ unanimously voted to keep monetary policy unchanged. The BoJ stated that it will continue easing until 2% inflation is stable, adding that it will examine risks and make policy adjustments as needed.


BoJ governor Kuroda says don't think pace of monthly JGB buying will change much next year. This was followed by reports that the Japanese Government Pension Investment will begin purchasing inflation linked JGBs from April, according to Health Ministry


State economist sees China 2013 GDP growth 7.6-7.7% according to Xinhua.


EU & UK Headlines


UK GDP (Q3 F) Q/Q 0.8% vs Exp. 0.8% (Prev. 0.8%)
- UK GDP (Q3 F) Y/Y 1.9% vs Exp. 1.5% (Prev. 1.5%)
- UK Index of Services (Oct) M/M 0.1% vs Exp. 0.3% (Prev. 0.2%)
- UK Index of Services (Oct) 3M/3M 0.8% vs Exp. 0.9% (Prev. 0.7%, Rev. 0.8%)
UK Current Account Balance (Q3) Q/Q -20.7bln vs. Exp. -14.0bln (Prev. -13.0bln, Rev. -6.2bln) - Largest deficit on record
S&P affirms UK long term sovereign rating at AAA; outlook still negative.
S&P cut the European Union to AA+; stable


S&P affirms Ireland's rating at BBB+/A-2; outlook remains positive.


ECB's Weidmann says risk that governments, private sector get used to cheap money, neglect structural reforms, keep zombie banks alive. Weidmann went on to say that low interest rates have side effects that increase the longer rates stay low and the ECB is ready to act if needed.


Italian Premier Enrico Letta's government's contested 2014 budget package will be put to a confidence vote in the Lower House today.


US Headlines


US Treasury Secretary Lew urged US Congress to take prompt action to raise the debt limit, ideally well before Feb. 7.US Senate sets vote on Fed chair nominee Yellen for Friday, with the possible confirmation vote on January 6.


Despite opposition from the Obama administration , 26 US senators introduced legislation on Thursday to impose new sanctions on Iran if the country breaks an interim deal under which Tehran agreed to curb its nuclear programme.


Equities


Following on from the mixed Asia session, European equities are green across the board despite being mixed in early trade. The Swiss SMI is leading the way with gains of around 0.60%, the periphery also being supported by the likes of Banca Monte dei Paschi following on from yesterday's gains, with Banco Popolare also seen up and thus Financials are leading the way. Elsewhere E.ON markets reacted positively to news that E.ON are planing to sell Spanish business. Finally, BAE systems are trading with losses of around 5% following reports that the UAE have decided against defense order including typhoon jet.


FX


During the Asian session USD/JPY tripped upside stops as it broke above yesterday’s high and rallied heading into the European open above the 104.50 level, with unconfirmed market talk of an option expiry in USD/JPY at 104.50 with barriers on the upside at 104.75 and 105.00. Elsewhere, GBP/USD is seen down following the release of the UK Current Account which showed the largest deficit on record.


Commodities


China are to overtake India as the top gold producer this year, according to analysts at ANZ.
Goldman Sachs forecasts gold at USD 1,144/OZ in 2014.
OPEC December oil output up 100,000 bpd vs November at 29.4bln bpd.
Enbridge's Gateway pipeline was approved with conditions


* * *


We conclude with Jim Reid's overnight summary


As we go to print, the European Union has been downgraded to AA+ from AAA by S&P. While the market digests the impact of the downgrade, all eyes remain on the US treasury market. Indeed treasuries are increasingly being viewed as a potential sign of the success or not of the Fed taper in early 2014. From the lows in the immediate aftermath of Wednesday’s FOMC, 10yr UST yields have added more than 10bp. Yields are slightly firmer as we type this morning (-1bp to 2.92%) though we’re still hovering at levels last seen in early September just before the Fed surprised markets with its non-taper. Despite this, we should note that US equities and credit were both reasonably well supported yesterday. However the combination of higher UST yields and a stronger dollar resulted in a fairly difficult day for EM. In EMFX, the Brazilian Real fell 1.1% against the USD, underperforming most other EM currencies. The move was exacerbated by the announcement from the BCB that it would wind back its intervention in the currency market, following the initial positive reaction to tapering on Wednesday. Other EM currencies also struggled including the TRY (-0.7%), MXN (-0.7%) and IDR (-0.3%). A number of EM equity markets struggled including in Poland (-0.7%) and Turkey (-3.5%).


LATAM sovereign credit spreads closed marginally wider on the day - but tightened into the close helped by another solid day for US credit led by CDX HY (+0.1% in price) and IG (-1.5bp in spread). On a more positive note, S&P announced overnight that it was upgrading Mexico’s credit rating to BBB+ from BBB prompted by the passage of energy reforms and changes in its fiscal framework..


Coming back to DM, it was a strong day for European equities (Stoxx 600 +1.7%) as they played catch up to the post-FOMC rally. However US equities spent the day in consolidation mode. The S&P 500 closed broadly unchanged (- 0.06%) after recovering from a 0.5% fall shortly after the open. Risk sentiment was probably weighed by the data flow which had a weaker tone. USNovember existing home sales fell for the third straight month (-4.3% vs. -3.2% prior and -2.0% expected). The National Association of Realtors noted that the government shutdown and lack of housing inventory all contributed to the drop off. The NAR also said that median home prices were up 9.4%yoy in November which is slightly lower than the double-digit price increases that we’ve become accustomed to of late. The Philly Fed survey ticked up incrementally from November (7.0 vs 6.5) but it was lower than the consensus of 10.0. The details of the report were more encouraging with new orders (15.4 vs. 11.8), shipments (13.3 vs. 5.6) and employment (2.2 vs. 1.1) all firmer in the month. Initial jobless claims were also worse than expected (379k vs 336k) as they rose to a near 9-month high. Seasonal holiday effects probably played a part in the claims data. The Fed announced yesterday that its balance sheet reached a record $4 trillion and Senator Reid said that the US senate will likely vote on Yellen’s confirmation in early January.


After the market close, consumer-bellwether Nike Inc reported Q2 results which were fairly mixed. Revenues of $6.43bn were slightly below consensus estimates but earnings were a bit better. Futures orders for delivery between December and April grew 12% (or 13% ex-currency effects), compared with growth of 6% in the same period last year with expectation. Encouragingly, futures orders in Western Europe were up 23% versus Bloomberg-compiled estimates of 11%. Nike’s China futures orders were up 1%, lagging estimates of around 3%. Nike’s shares traded about 1% lower in after-market trading. Another consumer-bellwether which made headlines was US retailer Target (-2.2%) which underperformed after it confirmed that it was investigating a data breach potentially involving millions of customer’s credit card records.


Turning to Asian markets, the post-FOMC rally has paused in Asian equities with losses across the Nikkei (-0.4%) and Hang Seng (-0.5%) overnight. The focus is again on China where there is plenty of discussion on the squeeze in interbank funding markets. Following a spike in rates early yesterday, the PBoC acted late on Thursday to inject liquidity via short term operations which resulted in a sharp drop in short term rates. However, the relief has been shortlived, and the closely-watched Shanghai 7-day repo rate has once again spiked up (+170bp today to 6.90%). The repo rate is now higher than yesterday amid market talk of a missed payment at a local Chinese bank. This is something to monitor over the next few days as Chinese interbank rates typically fluctuate towards month/year end. The cautiousness in funding markets is weighing on Chinese equities today with the Shanghai Comp and HSCEI down by 1.0% apiece. Elsewhere, there were no major surprises from the BoJ meeting today and it appears that the central bank is content to wait for the impact of sales tax hikes in April 2014 before deciding on policy adjustments if any.


Looking at the day ahead, a number of US equity options and futures contracts expiries occur today. French business confidence, the Kansas City Fed manufacturing survey and the third estimate of US GDP are the data releasesto note as we head into the final trading days before the Christmas break.

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