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Prospects Daily: Euro weakens, Singapore’s economy rebounds, Chinese stocks continue to fall

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Financial Markets…The European Central Bank said on Friday that some 356 regional banks will pay back €61.1 billion ($80.5 billion) of its second three-year loan borrowed under the second Longer Term Refinancing Operation (LTOR) a year ago as the first opportunity for early repayment opens on February 27. The reported amount represents just under 12% of a total €529 billion borrowed by 800 euro-zone banks last February from the ECB, and it is far smaller than consensus market expectations (around €130 billion).

The euro fell as low as to $1.3157 versus the dollar on Friday, the weakest level since January 10, as a less-than-estimated LTOR repayment amount dented investor sentiment. The disappointing repayment figures may indicate some banks are still relying heavily on the ECB funding. The 17-nation currency depreciated against the Japanese yen and British pound.

High-income EconomiesGerman business sentiment improved to a ten-month high, with the headline IFO business climate index rising for a 4th straight month to 107.4 in February from 104.3 in January. This was the highest reading since April last year and the biggest improvement since July 2010.

The US Philly Fed Index of manufacturing activity in the Philadelphia region slid to -12.5 in February from -5.8 in January, with a negative reading indicating a contraction in activity. Separately, the Conference Board index of leading economic indicators improved only modestly by 0.2% in January following a 0.5% increase in December, weighed down by poor outturns for manufacturing orders.

Singapore’s economy rebounded in the fourth quarter of last year, growing by 3.3% (q/q saar) after shrinking by 4.6% (q/q saar) in Q3. Growth for the entire year was just 1.3% down from 5.2% in 2011.

core inflation slowed to 1.0% (y/y) in January from 1.1% the previous month, well below the Bank of Canada's medium-term inflation target of 2%. The headline index rose by 0.5%, down from 0.8% in December. Separately, retail sales slumped by 2.1% (m/m) in December after growing modestly 0.3% (m/m) in November. This was the biggest one-month decline since April 2010.

Developing Economies
East Asia and Pacific: Chinese stocks continued to fall on Friday, with the benchmark Shanghai Composite Index posting its biggest weekly loss in 20 months with a 4.9% drop, amid concerns the government will adopt tighter monetary policy to ease potential inflationary pressure. Profit-taking by investors also contributed to the sharp weekly loss as the rally between early December and February 8th saw some 30% gains

Europe and Central Asia: Armenia’s inflation eased in January to 2.6% (y/y), down from 3.2% (y/y) in December on the account of easing food prices.

South Asia: Nepal’s inflation edged lower in the month ending in mid-January as it grew 9.8% (y/y) down from over 10% (y/y) in each of the previous five months. The central bank revised its inflation target for the fiscal year ending in mid-July to 9.5%, up from 7.5% previously.

Sub-Saharan Africa: Ethiopia’s central bank reduced its required reserve ratio from 10% to 5%. The reserve requirement was last changed in January 2012, when it was reduced from 15% to 10%. Banks have also been given a two-year grace period within which to restructure their loan portfolios, so that 40% of loans comprise of short-term loans, in order to reduce the mismatch between assets and liabilities.

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