* A look at the day ahead from European Economics and Politics Editor Mark John and EMEA Markets Editor Mike Dolan. The views expressed are their own.
LONDON, Feb 9 (Reuters) - German industrial output plunged unexpectedly in December, data showed on Tuesday, in a sign that Europe's largest economy ended 2015 on a weak footing. At the same time, Jens Weidmann, the head of the Bundesbank, has challenged the positive narrative suggesting that an influx of refugees will be positive for the economy, arguing that it will in fact have a dampening effect for a sustained period.
It's not always easy being a Spanish monarch. An independence push in Catalonia remains a low-lying but ever-present challenge to the unity of King Felipe VI's state, while the inconclusive outcome of December's elections has thrust him into the role of power broker in a country grappling with rapid social change. Most toxic of all in the near-term, however, is the corruption trial of his sister Princess Cristina, due to resume in Mallorca on Tuesday. The princess is charged with two counts of being an accessory to tax fraud in a case centred on her husband Inaki Urdangarin's business dealings. She (Munich: SOQ.MU - news) denies wrongdoing but faces weeks of court appearances which will do little for the image of the monarchy.
It is perhaps a sign of the soul-searching going on within the European Union when the core group of its founding members huddle together for talks on its future. That is what foreign ministers from Italy, Belgium, France, Germany, Luxembourg and the Netherlands will do in Rome today. They'll have a joint news conference at 1800 GMT.
MARKETS AT 0745 GMT
Stormy weather. What started off a relatively mild start to a holiday-strewn week for world markets quickly turned into a mini hurricane, with the banks at the heart of it. Heavy losses for European and US bank stocks, which saw the likes of Deutsche shed almost 10 pct, Morgan Stanley (Xetra: 885836 - news) lose almost 7 pct and Barclays (LSE: BARC.L - news) briefly suspended, was compounded by spike costs of credit insurance on their debts, with CDS rates and bank bond spread premia rising across the board. There was no one trigger yesterday except growing anxiety about the damage to bank balance sheets and margins from negative central bank rates, flattening yields and evaporating benchmark government yields, and what many economists are now saying is a 1-in-5 chance of global recession on the horizon. In many respects, this is the culmination of the commodity and emerging market shocks we've seen over the past year which have damaged global growth forecasts as well as stoked deflation fears.
All sorts of other related crosswinds are also buffeting the banks. The drain on emerging market central bank reserves and their sovereign wealth funds has raised serious questions about the withdrawal of the latter from the liquid developed markets they are largely invested in. JPM estimates SWFs hold about half their investments in public equity, with western Europe and banks/financials the most exposed. Beyond oil, China's reserve managers, for example, hold significant stakes in Italian banks. What's more, the stress and risk aversion have fed into euro government markets too, with peripheral spreads from Greece and Portugal to Italy and Spain blowing out. Political pressures on the EU and within the euro zone are not helping -- stuttering Greek budget talks, Brexit fears that affect European stability as well as the UK economy and concerns about how to deal with tens of thousands of new Syrian refugees on Turkey's borders.
But if fear of negative rates is at the centre of the financial storm, then the drop in Japanese 10-year government yields into negative territory for the first time overnight will only unnerve investors further. The Nikkei was down more than 5 pct overnight. With the dollar on the backfoot as Treasury yields plummet (at just 1.68 pct, 10-year Treasury yields are at lowest since January 2015) and Fed hike expectations recede, there is ever greater pressure on the BoJ to move again in the face of the sharp yen surge this week. Ditto for the ECB at its March meeting with the euro back as high as $1.12. Although Wall St clawed back some of its eye-watering losses by the bell, the S&P500 still ended down 1.4 pct and futures there are still down this morning. Eurostocks futures and the banking sector sub-indices are also down again after 3-5 pct losses Monday. Lousy German industrial and trade data for December will only add to the jitters. Brent oil, out of the picture for the moment, hovers just above $33.
Upcoming events/data/ themes for market reports on Tuesday:
- European corp events: UniCredit (EUREX: DE000A163206.EX - news) , Enel (Milan: ENEL.MI - news) , Banco Popolare (Amsterdam: PB8.AS - news) , ICAP (Other OTC: IAPLF - news) , TUI (Other OTC: TUIFF - news) , Actelion (LSE: 0QMN.L - news) , Svenska Handelsbanken (LSE: 0R7S.L - news) , Sanofi (NasdaqGM: GCVRZ - news)
- Swiss Jan jobless
- German Dec trade, industrial output
- UK Dec trade
- Greece Dec industry output
- SAfrica Q4 jobless
- Portugal Q4 jobless
- UK 2046 gilt auction
- US Treasury auctions 3-year notes (Editing by Sonya Hepinstall)