Risk Appetite Lifted by China GDP, EFSF Downgrade Ignored

Risk appetite recovers in Asia following stronger than expected economic data from China. Q4 GDP slowed to 8.9% yoy, the weakest in 2.5 years. However, that was better than market consensus of 8.7% yoy. The moderation in GDP growth supports further easing from China while the data also suggested that hard landing is unlikely. Other data from China were also solid with industrial production rose 12.8% yoy in December while retail sales rose 18.1% yoy. Asian equities are broadly higher following the news with Nikkei up over 60 pts, HK HSI up over 300 pts while Shanghai composite up 20pts at the time of writing. Aussie is the strongest currency on China data as usual with AUD/USD breaching 1.0385 resistance to resume recent rally while EUR/AUD dives to new record low.

After downgrading nine Eurozone states last week, S&P cut the credit rating of EFSF bailout fund yesterday, by notch to AA+ from AAA. The rating agency said that "EFSF’s obligations are no longer fully supported either by guarantees from EFSF members rated AAA by S&P, or by AAA rated securities". Meanwhile, "credit enhancements sufficient to offset what we view as the reduced creditworthiness of guarantors are currently not in place". S&P also warned that it could change the outlook to negative to "mirror the negative outlooks of France and Austria" if no credit enhancement options are adopted by the EFSF. In response to the downgrade, EFSF CEO Regling said the fund has "sufficient means to fulfill its commitments under current and potential future adjustment programs until the ESM becomes operational in July 2012". The comments were echoed by EU Luxembourg Prime Minister Juncker.

France passed the first post downgrade bill auction test yesterday as it managed to sell EUR 1.895b of one year notes with yield down to 0.406%, from January 9's 0.454%. EFSF, which was just downgrade, will auction EUR 1.5b in six-month debt for funding bailout of Ireland and Portugal. The main challenge this week would possible by Portugal. Just after the country was downgraded to junk status, the 10 year yield rose to record high of 14.48% while spread with Bund jumped to record 12.7%. Portugal is set to sell EUR 2.5b of 3-, 6- and 11- month bills tomorrow.

BoC rate decision will also be a focus today. The BoC is expected to keep the overnight rate unchanged at 1% in January. While both external economic headwinds and domestic problems are posing threats to Canada's economic outlook, recent encouraging macroeconomic data from the US should help the BoC buy time in assessing the big picture before making a decision. It's likely that the central will leave the monetary policy as it is for the rest of the year. Should the Fed announce in coming meetings that interest rates will stay unchanged at exceptionally low levels longer than mid-2013, the BoC would even be harder to alter its policy. More in BOC To Leave Policy Rate At 1%.

The economic calender is also heavy with UK CPI, ECLG house prices, German and Eurozone ZEW, Eurozone CPI, Canadian international securities transactions and US empire state manufacturing.