Danske Daily

S&P downgrades EFSF one notch to AA+, as expected.

Better-than-expected Chinese industrial production, retail sales and Q4 GDP figures.

Asian stock indices are up this morning and EUR/USD is back above 1.27.

Focus today will be on the Greek PSI negotiations and the follow-up rating verdicts from S&P. ZEW data, UK and euro area CPI could attract attention as well.

Markets Overnight

S&P has downgraded the EFSF one notch to AA+. The move was expected after the downgrade of nine euro-area countries last Friday, see our Flash Comment: S&P downgrade and implications published on 16 January 2012. Now that France and Austria have lost their AAA rating the combined guarantees of the four remaining AAA countries amount to EUR270bn, substantially less than the fund’s full issuance capacity of EUR440bn. This was not enough for the rescue facility to maintain the highest rating. Germany has indicated that it is not ready to increase the guarantees. Wolfgang Schäuble, the German finance minister, was quoted saying to German radio that “the guarantee sum that we have is sufficient by far for what the EFSF has to do in coming months.” EFSF will be selling 6-month bills today, see also FT and Eurogroup President statement.

ECB President Draghi downplayed the role of the rating move in a speech to the European parliament last night: “To a great extent, markets anticipated these rating changes and priced their assets as if these ratings had already been issued” and that “all rating agencies had loss of reputation”.
Stronger-than-expected Chinese data were released overnight, which has fuelled positive sentiment. Chinese Q4 GDP rose 8.9% y/y down from 9.2% y/y in Q3. Consensus expectations on Bloomberg were 8.7% y/y. Industrial production increased to 12.8% y/y in December up from 12.3% in November (consensus 12.3% y/y). Retail sales also beat expectation in December, when growth in retail sales accelerated to 18.1% y/y after increasing 17.3% y/y in the previous month (consensus 17.2% y/y).

Most European stock indices managed to lock in gains in Monday’s trade despite the rating verdict from S&P after close Friday. In Asia stock indices are also trading in positive territory this morning, reversing some of yesterday’s losses. Nikkei is up by 0.9% and Hang Seng by 2.1%. In FX markets EUR/USD has strengthened somewhat as risk sentiment has improved following the better-than-expected Chinese data. This morning the cross is back above 1.27. US financial markets were closed yesterday in observance of the Martin Luther King Jr. Holiday.

We will publish our global growth forecast today (09.00 CET). We expect the global economy to improve over the coming year as China starts pulling again. The US economy will continue the moderate recovery and the euro area recession is likely to be short, but growth remains weak. The euro debt crisis will continue and we expect a continued muddle-through with high volatility - but no break-up.

Global Daily

Focus today: The troika is expected to send a delegation to Athens today to continue the negotiations on the second rescue package. The negotiations on the Greeks PSI between IIF and the Greek government are set to continue tomorrow. The key questions remain what the coupon should be and whether collective action clauses are to be imposed, hence, whether the leaders are still aiming for a “voluntary” deal. On the release calendar UK CPI and euro area core CPI are expected to attract attention. Despite euro area headline inflation edging lower we expect an increase in core CPI in December to 1.7% from 1.6% in November. German ZEW data usually also attract some attention. We should see a increase, as this indicator is usually sensitive to market sentiment. In the US empire manufacturing is the main release today.

Fixed income markets: Yesterday's downgrade from S&P of the EFSF to AA+ is hardly a big surprise to the markets after the downgrades of France, Austria and a number of other EMU member states last Friday. EFSF to sell 6M bills today, which shouldn't be a major problem. Spain, Belgium and Greece are also selling short-term bills. The markets are likely to continue to focus on the negotiations on the Greek PSI, which are entering a final phase.

FX markets: While equities traded lower yesterday, EUR/USD managed to hold steady just below 1.27. However, although short euro positioning is stretched, risks still seem to be to the downside with particularly Greek default fears and European downgrades dominating the news flow at the moment. There are also indications that the euro is losing some of its correlation with risky assets, as investors are reluctant to add euro longs in the midst of the debt crisis, despite decent performance on equity markets over the past couple of weeks. Focus today is likely to be on any further developments regarding Greece and in that respect today's monetary policy meeting in Canada is likely to step in the background. Nonetheless, we look for the BoC to keep rates steady, and expect CAD to receive tailwind in the coming months from decent US growth and elevated commodity prices. Also note that we will send out updated FX forecasts today.

Scandi Daily

Sweden: Statistics Sweden will release December PES Unemployment this morning. The market is expecting a moderate seasonal rise from 4.4% to 4.6% which may prove to be on the low side as several indicators such as layoffs and job openings have deteriorated recently. We do expect unemployment to rise significantly this year, giving Riksbank plenty of ammunition to cut the repo rate down to 0.5 % in the second half of the year.