- The risk-on mood continued in Friday's US session helped by strong earnings reports.\
- In Davos currency war became a theme as China warned against competitive devaluation.
- Chinese industry showed double-digit annual profit growth in December.
The risk-on mood following ECB’s announcement that euro area banks will return EUR137.2bn of three-year LTRO money continued into the US session on Friday. The impact of the bigger-than-expected repayment has been much larger than the reduction in excess liquidity should suggest and appears to be driven by investors seeing the large repayment as a sign that banks are healthier than feared and assuming that future repayments will also be larger than expected. The next announcement of early repayment on Friday at noon will be watched closely as this sets the ground for the projection of future repayments.
At the World Economic Forum’s annual meeting in Davos currency wars became a theme with Japan’s Economy Minister Akira Amari saying that Japan aimed to defeat deflation rather than weaken the yen, while Chinese foreign exchange regulator Yi Gang was quoted as saying that the yuan ‘is pretty much close to equilibrium level’ and urged ‘better communication and coordination’ of foreign exchange at a global level. He warned that ‘quantitative easing for developed economies is generating some uncertainties in financial markets in terms of capital flows’ and that ‘competitive devaluation is one aspect of it’. Chinese industry profits rose 17.3% y/y in December making it the third consecutive month of double-digit annual growth, a report released Sunday showed. 29 out of 41 sectors reported increasing profits. The ECB Governing Council has rejected the Irish government’s wish to convert promissory notes into longterm bonds because it amounts to monetary financing of the Irish government according to Reuters’ sources. Irish Minister for Foreign Affairs, Eamon Gilmore, said that ‘failure to conclude negotiations on the promissory notes would have a potentially catastrophic effect on Ireland’. The next EUR3.1bn payment on the promissory notes is due end March.
The 10-year US bond yields rose as much as 11bp Friday - the biggest increase in more than three months - while 2 year yields rose 3bp. In the equity markets both Dow Jones and S&P 500 rose 0.5% and the latter thus reached a milestone as it closed above 1500 for the first time in more than five years. Nasdaq increased 0.6%. Strong US earnings reports helped to lift market sentiment. Chinese stocks were lifted by the strong profit data and Hang Seng is up 0.5% while Nikkei is down 0.7% this morning. In the FX markets EUR/USD traded above 1.3450 in Friday’s US session, hitting the highest level in 11 months. This morning EUR/USD is trading around 1.346. USD/JPY moved higher to 91.0 on Friday and after some temporary yen strengthening it is again trading around 91.03 this morning.
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