Euro energy crisis can deepen the inflation story AND More

1. China announced a rate cut for the first time through the pandemic. This comes at a time when the currency is as strong as its 2015 high, so the rate cut may help the exporters to be internationally competitive. The rate cut was very modest of only 5 bps in the one year prime rate. This was done to manage the economy under pressure from a property slowdown, energy shortages and lingering weakness in consumer activity.

2. While RBA in Australia is inching up to cease their asset purchases and if indicators favor their projects, may also start the first leg of taper this feb. The labor market looks strong, plus the supporting consumer spending, in addition to confident businesses.

3. European power prices hit new record highs amid nuclear outages and pricey gas rates. German power for next year jumped to a high of 335 euros/MWh, following a 25% rally on Tuesday, before slipping back. The energy price surge is bound to push the inflation higher.

4. INR is the worst performing currency in Asia this year. This was evident from the vaccine and virus story. India lags all other major countries in covid vaccination. Where business and activity has resumed to pre covid levels in most other nations India is still grappling with vaccine drives. Foreign investors have pilled out $4.2bn this quarter from the national bourse. Policy divergence for the Fed and increasing trade deficit are also among some reasons for the fall. Furthermore, due to the Turkey rout, funds have pulled out of the EM mandate.

5. This makes our imports expensive and thus puses the inflation even higher. A weakening currency is tough for Rbi to tackle, given the various fronts at which we need quick and urgent addresal. And now we are highly subject to the oil market dynamics, if oil rises we wouldn’t be in a good shape.

6. This month the OTC derivative market (especially the NON USD swap trades) migrated to the RFR based swaps. The floating libor legs were rebooked with the rfr rates+ISDA fallback rates. The trades against the Central Clearing parties were rebooked with the changed convention. This marks a big step in the broader RFR migration project.

7. The markets also moved the Cross currency trades to the new RFR vs RFR convention. This is interesting as till now the inter dealer markets were quoting the xccy basis as spread to the underlying libor rate, but now the interdealer market screens would show just the rfr based basis.

8. The total value of global M&A transactions through Dec. 21 was $5.7 trillion, up 64% from the same period a year before. Furthermore, many of the factors that propelled M&A activity this year are going to continue strong next year too.

9. Municipal bond investors are piling into exchange-traded funds, attracted by low costs and the ability to trade quickly. Muni ETFs held $80 billion as of the end of the third quarter, up from less than $50 billion two years ago, Federal Reserve data shows. Citigroup projects they will hold $125 billion by December 2022.

10. Interesting Charts: