PBoC Allows Yaun to Weaken

This morning the Chinese central bank allowed the yuan  to weaken  by setting the daily fixing 0.18% weaker against the dollar, which has lifted Asian stock markets.

US stock markets gained moderately in yesterday’s trading.

In Europe concerns are still lingering with political and financial trouble in Hungary now topping the agenda. Furthermore, some concerns over the situation in Greece seem to be returning.

Markets Overnight

It has been a shaky start to the year and it seems like we will have to wait a bit for the return of a more positive sentiment  to the markets as fears over the  eurozone and the Chinese growth outlook linger. The Asian stock markets are trading in positive territory this morning helped by the Chinese central bank (PBoC) who has de facto allowed for the yuan to weaken by setting the fixing 0.18% weaker. This is in no way dramatic, but it might indicate that the PBoC is concerned about the downside risks to Chinese growth. It is also a signal that the PBoC might allow for great daily two-way volatility in the yuan. Today’s move has not had a  large impact on market expectations  about future yuan moves.
 
The overnight action in the global fixed income and FX markets has been relatively muted, but the euro crisis is far from over and it is clear that investors are still not willing to fully endorse a more optimistic scenario for Europe – and the global economy.

In Europe the problems have spread to outside the eurozone and especially the situation in Hungary is increasingly attracting attention from investors. The Hungarian government’s hostile attitude towards not only international creditors and institutions but also towards its own central bank has clearly spooked investors. The Hungarian CDS continues  to widen and  the  forint is  now trading close to an all-time low against the euro. The Hungarian worries have had some impact on  the  other Central and Eastern European markets – most notably the Polish zloty has taken a bit of a beating losing more than 1% against the euro in yesterday’s trading.

Hungary is not the only European trouble spot. Greece seems to be back on the agenda as Greek Prime Minister Papademos yesterday called for further austerity measures. However, the leader of the conservative New Democracy Party – a partner in Papademos’ government – Antonis Samaras yesterday ruled out new cuts in pensions. This indicates that there is some disagreement in the Greek government concerning  the  new austerity measures.

Global Daily

Focus today: France will auction bonds with maturities ranging from 10-30 years today. There are no tier-1 data today, but US ADP private employment  might attract some attention ahead of the employment report tomorrow. It was rather strong in November at 206k, painting a quite upbeat picture of the labour market. Consensus looks for a decline to 168k. Initial jobless claims will also be released and have shown a similar picture of improvement with the 4-week average falling to 375k last week, the lowest level since June 2008. Finally, ISM non-manufacturing is expected to show a further increase as the
improvement seen in other indicators is likely to spill over to the service sector. Keep an eye on the employment index ahead of Friday's payrolls.
Fixed income markets: The relatively small take at ECB’s 3m USD tender yesterday could be an early indication that the liquidity situation has improved markedly in the eurosystem. Euribor fixings continue lower at a rapid pace and the increase in the USD Libor also appears to have been halted. Further improvement in today’s US data releases should support steepening of the US 2-10 swap curve. A near-term risk for the markets could be further escalation of the situation in Hungary.

FX markets: The euro came under renewed pressure yesterday as focus once  again turned to the European debt crisis when Greek Prime Minister warned about an economic collapse in Greece as soon as March and as European equities retreated. EUR/JPY is once again close to an 11-year low. Today the FX market will follow the French government auction closely. If it is unsuccessful we could see further pressure on the euro. The FX market is also closely following the worrying developments in Hungary that put the forint under  renewed pressure yesterday. See  Flash Comment  - Hungary:  Political induced market stress that we published on 3 January 2012.

Scandi Daily
Norway: Today Norges Bank will issue NOK5bn in the 1-year NST17 t-bill. We expect healthy demand due to Norway's strong fundamentals. Together with the elevated oil price it could further support NOK today.