Things in risk land started off badly this morning, with the worst start to a year ever was set to worsen when European equities came under early selling pressure following news of German unemployment falling to record low, offset by a record high Italian jobless rate, with declining oil prices still the predominant theme as Brent crude briefly touched its lowest level since May 2009, this consequently saw the German 10yr yield print a fresh record low in a continuation of the move seen yesterday.

However, after breaking USD 50.00 Brent prices have seen an aggressive bounce which has seen European equities move into positive territory with the energy names helping lift the sector which is now outperforming its peers. As a result fixed income futures have pared a large majority of the move higher at the EU open. But the punchline came several hours ago courtesy of Eurostat, when it was revealed that December was the first deflationary month for the Eurozone since the depths of the financial crisis more than five years ago, when prices dropped by -0.2% below the -0.1% expectation, and sharply lower than the 0.3% increase in November, driven by a collapse in Energy prices.

And to think it was just October when this exchange with an ECB member took place, as part of the Eurozone's annual stress test farce:

My question would be on how credible these tests are. Looking at the adverse scenario, you haven't even included deflation. You have not included an interruption in gas imports to Europe. You have not included full-on sanctions on Russia. So please elaborate and convince us.

Constâncio: The scenario for the stress test was published earlier in the year, so some of the things you mentioned would not have been considered. But indeed, what was considered is a severe shock being the growth of other countries. If you look to the scenario, you see that for the US, there is also a big deceleration of growth which is part of the scenario and also for other countries that are the markets of the euro area. So that is embedded in those assumptions of indeed a big drop in external demand directed to the euro area. That's the first point.

The scenario of deflation is not there because indeed we don't consider that deflation is going to happen.

Two months later, it happened.

And while its happening once again crushed the ECB's credibility, the “good news”, and the reason stocks took off the moment deflation hit, is that algos are desperately hoping this finally unleashes Eurozone QE, perhaps as soon as three weeks from now when the ECB is said to be discussing three different options. This is taking place despite not only Merkel advisor Lars Feld warning ECB will “damage its reputation” if it announces QE plans before the Greek election but Merkel ally Michael Fuchs repeating that Grexit is no longer a systemic threat, and warning that launching QE now would crush any impetus for further reforms. He is right, but algos don't care. At least not for now, and as a result futures are sharply higher on both sides of the Atlantic.

FX

The USD-index (+0.17%) is marginally stronger ahead of today's FOMC minutes with market participants expecting the Fed to clarify their ‘patient' rhetoric from December's FOMC rate decision. This helped USD/JPY stage a minor recovery overnight, with the pair breaking above the 119.00 handle however trade has been range-bound since the European open. With the resurgence in energy prices, commodity currencies including the NOK, RUB and CAD have strengthened slightly against the USD granting the currencies some reprieve after the selloff yesterday.

Commodities

Oil initially continued its downward trend as Brent crude briefly broke below USD 50.00 for the first time since May 2009 and WTI crude broke below USD 47.00 with the downside attributed to the overnight comments from UAE Oil Minister asserting that market oversupply may last months or years and depends on non-OPEC output growth. However, this move has retraced with the Brent and WTI crude currently trading in positive territory. The precious metal markets, Gold has pulled off yesterday's 3 week highs where the safe-haven bid was lifted amid weakness in global equity markets after a continued slump in crude and disappointing data from EU and US. Looking ahead, todays DoE Crude Inventories could provide some downside for oil prices as analyst expectations show a build of 700K.