Risk aversion sentiment back on front burner

EU Mid-Market Update: Risk aversion sentiment back on front burner; Riksbank cuts Repo Rate further into negative territory

Notes/Observations

- Risk aversion sentiment continues to heat up on global growth concerns; JPY currency leading the safe-haven flows; Various European bond yields at record lows (Germany 5-year; UK 10-year among them); WTI oil below $27 per barrel

- Sweden Central Bank (Riksbank) cuts rates further into negative territory (more aggressive than analysts forecasts) as global central banks restart the race to the bottom

Economic data

- (HU) Hungary Jan CPI M/M: -0.1% v +0.1%e; Y/Y: 0.9% v 1.2%e

- (TR) Turkey Dec Current Account Balance: -$5.1B v -$5.0Be

- (PH) Philippines Central Bank (BSP) left its Overnight Borrowing unchanged at 4.00 (as expected)

- (CH) Swiss Jan CPI M/M: -0.4% v -0.4%e; Y/Y: -1.3% v -1.3%e

- (SE) Sweden Central Bank (Riksbank) cut Repo Rate by 15bps to -0.50% (more than expected)

**Fixed Income Issuance:

- (SE) Sweden sold SEK1.0B vs. SEK1.0B indicated in I/L 0.125% 2026 Bonds; Avg Yield: -0.6578%; Bid-to-cover: 3.038x

- (IE) Ireland Debt Agency (NTMA) sold €1.0B vs. €1.0B indicated in 1.0% May 2026 IGB Bonds; Avg Yield: 0.999% (record low) v 2.315% prior; Bid-to-cover: 1.80x v 2.74x prior

- (IT) Italy Debt Agency (Tesoro) sold total €5.5B vs. €4.0-5.5B indicated in 2018, 2022 and 2030 BTP Bonds

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

**Equities**

Indices [Stoxx50 -3.7% at 2,688, FTSE -2.7% at 5,520, DAX -2.9% at 8,762, CAC-40 -3.8% at 3,909, IBEX-35 -3.9% at 7,830, FTSE MIB -5.0% at 15,900, SMI -3.2% at 7,488, S&P 500 Futures -1.8%]

Market Focal Points/Key Themes: A sea of red engulfs the European equity indices after getting hit on the back of aggressive selling in WTI, and after comments yesterday by Fed Reserve Chair Janet Yellen suggesting uncertainty over the timing of future US rate hikes; Commodity and financial stocks weighing on the FTSE 100 this morning with Standard Chartered, BP and Rio Tinto leading the losses; Financial stocks such as BNP Paribas, Soc Gen, Deutsche Bank and Commerzbank weighing on the Eurostoxx; a plethora of upcoming notable US earnings include Advance Auto Parts, Avon Products, Bunge, Peabody Energy, BorgWarner, Coca-Cola Enterprises, Cenovus Energy, Group 1 Automotive, Huntsman Corp, Kellogg, Manchester United, The Mosaic Company, Penske Auto Group, Pepsico, Reynolds American, Teva Pharmaceuticals, Thomson Reuters, and TransCanada.

Equities

- Consumer discretionary: [Adidas ADS.DE +0.5% (Prelim FY15 results), Edenred EDEN.FR -13% (FY15 results), Imperial Brands IMT.UK -1.4% (Q1 results), Metro AG MEO.DE -4.1% (Q1 results), Pernod-Ricard RI.FR -5.0% (H1 results), Publicis PUB.FR +5.3% (Q4 results)]

- Energy: [Royal Dutch Shell RDSA.NL -2.5% (Cancellation of bridge credit facility), Total FP.FR -2.5% (Q4 results)]

- Financials: [Societe Generale GLE.FR -13.8% (Q4 results), MedioBanca MB.IT -10.9% (Q2 results)]

- Industrials: [Faurecia EO.FR -8.5% (FY15 results), Gerresheimer GXI.DE -2.7% (FY15 results), Outokumpu OUT1V.FI +1.1% (Q4 results), Veidekke VEI.NO -2.0% (Q4 results), Yara International YAR.NO -3.0% (Q4 results)]

- Materials: [Boliden BOL.SE -12.2% (Q4 results), Kemira KRA1V.FI -8.1% (Q4 results), Rio Tinto RIO.UK -5.4% (FY15 results)]

- Technology: [Legrand LR.FR -5.3% (FY15 results, dividend increase), Rexel RXL.FR -10.5% (FY15 results)]

- Telecom: [Alcatel-Lucent ALU.FR -0.3% (Q4 results), Nokia NOK1V.FI -1.9% (Q4 results)]

Speakers

- ECB's Liikanen (Finland): Reiterates that QE policy is working since its implementation. Reiterated that inflation was still more subdued than expected and General Council could review policy in March

- ECB's Nowotny (Austria) reiterated General Council view that euro economy seen improving in 2016 with inflation picking up in H2 of year. Inflation could be negative for some months in H1

- Sweden Central Bank (Riksbank) Policy Statement reiterated view could cut Repo Rate further if necessary. It also reiterated that was prepared to intervene on FX market if needed if krona appreciated faster than forecast. Govt bond buying scheme to continue for the 1st six months under current plan; could be amended (security purchases can be extended)

- EU's Dombrovskis: To reassess Portugal budget in spring

- Poland Central Bank member Gatnar reiterated no reason for Poland to lower CPI target

- Philippines Central Bank Policy Statement noted that CPI was seen returning to target path in both 2016 and 2017. It forecasted 2016 inflation at 2.2% and 2017 inflation at 3.2%. It saw upside risk from El Nino and possible utility hike and risk of lower global growth and lower oil prices

- Japan Vice Finance Min Asakawa reiterated that was watching markets to determine whether FX moves are speculative

Currencies

- USD was facing continued headwinds after Fed chair Yellen suggested that it could delay (not abandon) planned rate increases in response to recent turmoil

- The JPY currency (Yen) was the main focus as it benefited from the global risk aversion sentiment. Again Japan Japanese govt official tried verbal intervention but it had little effect for the time being. USD/JPY tested below the 111 level for 15-month lows (last tested back in Oct 2014 when BOJ announces a surprised QE). This was the ninth consecutive trading day that a new lower low in the USD/JPY pair. EUR/JPY cross hit a 30-month low as it tested 126

- The SEK currency (Krona) weakened after a more aggressive rate cut by the Riksbank. EUR/SEK jumped from 9.46 to test above 9.61 on the 15bps cut further into negative territory. Analysts had expected only a 10bps cut.

**Fixed Income:

- Bund futures trade at 165.50 up 102 ticks having traded to fresh contract highs on continued risk aversion sentiment, with the Bobl trading at fresh all time low yields. Having traded as high as 165.76 analysts eye a break testing 165.98 with further levels of interest at 166.23 and 166.43. Support moves to 165.23 previous high followed by 164.76 gap fill with 164.18 looking to cap the move.

- Gilt futures trade at 122.75 up 97 ticks having traded as high as 122.98 with yields reaching record low levels as stocks continue to fall. Having risen sharply this morning analyst see resistance at 123.11. Support moves to 122.11 previous high followed by 121.79 gap fill with further downside looking to test 121.44.

- Thursday's liquidity report showed Wednesday's excess liquidity rose to €670.8B a rise of €1.3B from €669.5B prior. This was primarily due to AFs and MonPol portfolios falling to negative €259.6B. AFs are negative when the MonPol portfolios exceeds the liquidity absorbing effect of AFs. Use of the marginal lending facility fell to €31M from a prior €127M.

-Corporate issuance remains a non factor with talk of a few days of stability needed to kickstart potential issuers. Itraxx cross over has risen to 480+ the widest since mid 2013.

**Political/In the Papers:

- (ES) ECB said to be investigating whether Bank of Spain employees under pressure from their superiors over their reports on banks

Looking Ahead

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 12 Month Bills

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

- 05:30 (UK) DMO sell £1.5B in 3.5% Jan 2045 Gilts

- 06:00 (IS) Iceland to sell Bills

- 06:00 (CZ) Czech Republic to sell 6-month Bills

- 06:00 (ZA) South Africa Dec Manufacturing Production M/M: +0.1%e v -1.2% prior; Y/Y: -1.5%e v -1.0% prior

- 06:00 (IL) Israel Jan Trade Balance: -$ v -$0.8B prior

- 06:30 (UK) BOEs Cunliffe and member Bailey in London

- 06:45 (US) Daily Libor Fixing

- 08:00 (RU) Russia Gold and Forex Reserve w/e Feb 5th: No est v $ prior

- 08:00 (RU) Russia Dec Trade Balance: $10.0Be v $9.1B prior; Exports: $27.0Be v $25.5B prior; Imports: $16.9Be v $16.4B prior

- 08:15 (US) Baltic Dry Bulk Index

- 08:30 (US) Initial Jobless Claims: 280Ke v 285K prior; Continuing Claims: 2.25Me v 2.255M prior

- 08:30 (CA) Canada Dec New Housing Price Index M/M: 0.2%e v 0.2% prior; Y/Y: No est v 1.6% prior

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

- 09:00 (MX) Mexico Dec Industrial Production M/M: +0.2%e v -0.5% prior; Y/Y: +0.3%e v -0.5% prior; Manufacturing Production Y/Y: 1.9%e v 1.8% prior

- 09:00 (EU) Euro-Area Finance Ministers (Eurogroup) meet in Brussels

- 09:00 (BR) Brazil to sell Fixed Rate 2023 and 2027 bonds

- 09:00 (BR) Brazil to sell 2017, 2018 and 2020 Bills LTN

- 10:00 (US) Fed's Yellen to appear before Senate Banking Committee

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

- 10:30 (NL) Netherlands Q4 GDP Q/Q: 0.3%e v 0.1% prior; Y/Y: 1.3%e v 1.9% prior

- 10:30 (NL) Netherlands Dec Trade Balance: No est v € 4.2B prior

- 11:00 (DE) German Chancellor Merkel at 2016 State election rally

- 11:00 (US) Treasury announcement for new 30-year Tips auctions (held on Feb 18th)

- 13:00 (US) Treasury to sell $15B in 30-Year Bonds

- 16:00 (CL) Chile Central Bank (BCCh) Interest Rate Decision: Expected to leave Overnight Rate Target unchanged a 3.50%

- 16:45 (NZ) New Zealand Jan Food Prices M/M: No est v -0.8% prior

- 17:30 (AU) RBA Gov Stevens in Parliament

- 18:00 (PE) Peru Central Bank Interest Rate Decision: expected to raise Reference Rate by 25bps to 4.25%