Financial market research and analysis

The European Central Bank decision followed by President Draghi’s presser are the main macro events of the day. The ECB is expected to maintain the status quo at today’s meeting and will most likely reinforce its dovish stance. China’s slowdown, the downside risks to the economic recovery, the negative effects of declining commodity prices to inflation levels will certainly be mentioned amid the headwinds and high volatility the market has suffered since the beginning of the year.

With the obvious exception of the Japanese yen, the single currency has outperformed the majority of G10 currencies since the beginning of the year as the risk-off sentiment pushed capital into the single currency although the ECB cut its deposit rate to -0.30% in December.

At this stage, the ECB is not in a position to satisfy the insatiable euro market. The ECB will likely adopt a clever strategy and let the market realise that the euro investments could well be swapped against better-yielding currency assets once the storm is over.

Eurozone bonds are swinging back and forth this morning as risk averse investors choose to park capital in the haven of government sovereigns. Already very expensive as a result of ECB purchases, the rush to Eurozone bonds and current levels do not provide a reasonable the risk-to-return leaving the field open to heavy speculation.

The euro remains rangebound versus the US dollar; a breakout of the 1.0800/1.1050 zone is required in order to confirm any fresh short-term direction.
Against the pound, the 0.7550/0.7600 shelters vanilla calls for due to expire today.

The FTSE remains under downside pressure as commodity prices are again in the red. The Chinese slowdown remains the main topic in World Economic Forum agenda in Davos. While in the longer term, the economic restructuring of the world’s second biggest economy will likely be a positive, the near term outlook looks less cheery.

Pearson (+7.98%) is leading gains in London after the company announced to cut 4000 jobs to save up to £350 million.

Royal Mail (3.13%) is bid on news that the trading update managed to meet expectations with a revenue rise of 1% and better-than-expected parcel volumes in the first nine months of the financial year.

UK miners made a quiet start, yet will likely rank among losers in the near term given the choppiness in commodity and oil prices.


BoC and BCB maintained status quoi, BoJ besieged

Swings in the Japanese market marked the session in Tokyo. Nikkei first recovered to 16734, then dropped 2.43%. USDJPY remained capped at 117.50. As the safe-haven cash is feeding into the yen, Japanese PM Abe’s aide said that the yen rebound must be stopped, they should not underestimate the risk of more gains, adding that the BoJ should act at its January 28-29 meeting (DJ). BoJ Governor Kuroda, sceptical about further easing and is as yet giving no signal of any intention to cut rates into the negative territory.

The Bank of Canada refrained from cutting its bank rate which sent the USDCAD to 1.4492 yet the pair quickly rebounded on falling oil prices and drastically lower GDP forecasts (to 0.0% from 1.5% in Q4 and to 1.4% from 2% average in 2016). UBS revised the USDCAD forecast on the upside. In yesterday’s note to clients, UBS analysts wrote ‘Our 3-month USD/CAD forecast is now 1.42, but oil remains key. We now forecast 1.35 for end-2016, when our oil & gas team expects oil inventory reductions and higher crude prices.’

Brazil Central Bank has also surprisingly kept the Selic rate unchanged at 14.25% (vs 25-50bp hike expected).