Market Opens Lower After S&P European Downgrades. French Auction Watched

Asian markets open broadly lower in reaction to S&P's downgrade of nine Eurozone states after Friday's close. Euro remains generally weak but the selloff is so far limited in Asia. The main reactions would likely be seen after European markets open and we'd anticipate deeper decline ahead in the day. There are talks that played down the significance of the downgrade as firstly it's widely expected for some time. Secondly, France was just downgraded by one-notch, which isn't the worst scenario. Nonetheless, markets are worried on the potential impact of the downgrades, including reduction of lending capacity of the EFSF. Also, there could be revisions to EFSF, corporate and domestics banks that would accelerate deleveraging in the markets, which might accelerate the position squaring in euro and risk markets. After all, there is no scope for a sustainable rebound in the common currency yet.

Suggested Reading on the Downgrade: Credit Rating Agency Standard and Poor's Downgrades Several Euro zone Sovereigns, S&P Downgrade And Implications

France's auction of EUR 8.7b of short term treasury bills would be a main focus today as investors react to the downgrade. A further test would be seen tomorrow when EFSF sell up to EUR 1.5b of six-month debts to finance the Irish and Portuguese bailout. Greece will restart the take with private creditors on haircut.

Last week's data showed China's forex reserve shrank for the first time in Q4 since 2009. China's State Administration of Foreign Exchange director Yi Gang was quoted today sing that the country could see some more months of net forex outflows this year even though the overall annual number would still be an inflow. Yi said that PBoC has been selling dollars since last September and selling has picked up during Q4. World bank's Chief Economist Justin Lin said China will face a relatively poor external environment for 20 years and urged the country to think carefully before making yuan a foreign reserve currency.

On the data front, Japan machine orders rose 14.8% mom in November, domestic CGPI rose 1.3% yoy in December. UK rightmove house price dropped -0.8% mom in January. Australia home loans rose more than expected by 1.4% in November. Swiss combined PPI will be released later today.