Danske Daily

Strong Spanish bond auction underpins risk sentiment.
Equity markets shrug off weak US data and finish higher.
EUR/USD moves higher as ECB stays put and points to signs of stabilisation.
Oil prices decline as EU oil embargo is likely to be delayed six months.
Chinese FX reserves fall for the first time since 1998.
Very light calendar today. Main focus on Italian bond auction.

Markets Overnight

Equity markets got a boost yesterday from the strong Spanish bond auction that eased fears over the euro crisis. The market even recovered from losses following much weaker-than-expected US data on retail sales and weekly jobless claims as the positive sentiment from the easing euro crisis took over as the dominant market driver. The S&P future is broadly unchanged in Asian trading. Asian markets are mixed with Chinese shares down, while the Japanese Nikkei index is up.

US bond yields moved slightly higher overnight as risk sentiment improved again following the weaker US data.

In FX markets EUR/USD moved higher yesterday  as ECB kept rates unchanged and pointed to signs of stabilisation  – see Flash Comment  – ECB meeting: ECB prefers to wait and see, published on  12 January 2012. EUR/USD held on to the gains in Asian trading. The euro also gained versus the  Scandi currencies with moves higher in both EUR/NOK and EUR/SEK.

Oil prices dropped USD2 to below USD111 per barrel after an EU official last night said EU’s oil embargo of Iranian oil is likely to be delayed six months to give countries like Greece, Italy and Spain time to find alternative supply. The oil price has climbed slightly back to USD112 during the Asian session.

China’s FX reserves fell for the first time since 1998 as the holdings by the end of Q4 2011 dropped to USD3.18trn from  USD3.20trn at the end of Q3. The small decline reflects lower foreign investment as the euro crisis and fears of a Chinese hard landing led to withdrawal of money from China by foreign investors.

Global Daily

Focus today: We have a very light calendar today. Most interesting event will be Italy’s government bond auction. Yesterday’s strong Spanish bond auction suggest that today’s Italian auction might also prove a success. US and euro-area trade balance for November will be released today as well as UK producer prices for December. Fed’s Duke, Lacker and Bullard are scheduled to speak today.

Fixed income markets:  The fairly muted market reaction in the European markets indicated that markets were broadly priced for the ECB keeping its policy rates unchanged. Draghi said that the 3Y LTRO is working and that the ECB expects large demand at the next three-year tender (29 February). Shorter-dated money market rates fell a few basis points following the press conference. Easing  signs are confirmed in our stress monitors, and we see further downside to Euribor fixings. As the calendar is light, the markets will focus on the bond auction in Italy today. We estimate that roughly EUR7-9bn of bonds will be tapped.  A successful auction should underpin the risk sentiment today.

FX markets:  Improving market sentiment dominated trading yesterday. The Spanish bond auction went smoothly and there were no surprises from neither ECB nor BoE. Given that market participants seem to have built heavy short positions in the euro, today's trading session could see the common currency post further gains if the improvement in sentiment continues. Market participants will focus  on the Italian bond auction and earnings announcements, with JP Morgan reporting today. There are no major scheduled data releases to divert the market's attention.