PRESSEMITTEILUNG | China’s woes back in the spotlight – Markets Today – 7 January 2016.

News and Events
– CH: This morning, the stock market was shuttered within half an hour of opening after falling 7%. The stock market will be halted for the rest of the day. Data on December foreign reserves are due later today. Oil prices are under severe pressure, testing new multi-year lows.

– GE: Factory orders rose more than expected in November, up 1.5% mom, while retail sales increased by 0.2% mom, after contracting 0.1% mom in October (revised upward from the previous -0.4% mom).
– IT: We expect the unemployment rate to have remained stable at 11.5% in November (10:00 CET).

– EMU: The economic confidence indicator is expected to edge 0.1pp down to 106.0 in December. In November, the unemployment rate probably remained steady at 10.7% and retail sales likely bounced back, rising 0.2% mom after falling 0.1% in October. All releases are due at 11:00 CET.
– Fed: Yesterday, the Fed released the minutes of the December FOMC meeting. The overall tone was somewhat cautious and the minutes highlighted concerns about the inflation outlook. Also yesterday, Fed Vice-chairman Fisher said that four rate hikes in 2016 sounds about right.

-US: Initial jobless claims are due today at 14:30 CET.

FI/FX Strategy
– FI View: Despite some encouraging US news yesterday (strong ADP report with +257k, non-manufacturing ISM just a fraction lower at 55.3 and the trade deficit declining by USD 2.2bn to USD 42.2bn), market sentiment appears unlikely to shift soon. Sharp volatility spikes in China (reflected by FX weakness with the CNH-CNY spread at the widest level ever), another drop in the oil price and global equity woes only add to the appeal of major bond markets.

– FR: France will sell up to EUR 9bn of 1% Nov25, 1.5% May31 and 3.25% May45 OATs today. Due to limited risk tolerance at the beginning of the year, the bull-flattening of curves that we anticipated has been strong right from the start of the year and we like the 10Y+ sector. While we still like the yield pickup of OATs over Bunds (ranging from around 37bp in ’25 to 60bp in ’45), OATs are not among our top picks and, as we wrote in a note on Monday, we currently favor Ireland over France right now.

– CNY: The PBoC has fixed the USD-CNY higher (by a whooping 332pips to 6.5646) for the eighth consecutive day. This has increased fears about the extent of the slowdown in China – and hence global growth – triggering another generalized wave of risk-off (with the CSI 300 plunging by more than 7% triggering a trading suspension, for the second time this week). Naturally, speculation of more capital outflows is increasing rapidly, weighing further on domestic asset prices and risk sentiment. Against this backdrop, the risk for continued and sustained CNY depreciation has risen sharply. We are currently reviewing our USD-CNY forecasts for this and next year and will soon provide a detailed update.

– CEEMEA: A defensive stance is warranted for EMFX. While EM data have been better of late, a combination of 1. widening US LIBOR-OIS spreads, 2. rising CNY depreciation expectations and 3. more-hawkish Fed rhetoric are negative catalysts. These have presented themselves against a backdrop in which there are 1. some measures of market volatility still at the lower end of recent ranges (e.g. MOVE index) and 2. still-modest pricing for a follow-on March rate hike (45% probability). Accordingly, the TRY and ZAR will be prone to further depreciation pressure against both the USD and EUR. In CE3, the lower-yielding CZK and HUF will hold up better than the PLN. Elsewhere, our 31 December USD-TRY 2.9570 call recommendation made on 20 November expired, leaving us with a loss of the entry cost of 0.7945% USD even though spot is up 5% since. The 3.00 level was cleared yesterday and further gains in USD-TRY are likely in the days ahead as investors continue to question CBRT independence and with the CB unlikely to tighten policy at its next meeting on 19 January.

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