Greenback is Softer but the Market may be Getting Ahead of Itself

Overview:  Global equities paid no mind to the losses seen in the US before the weekend.  After falling for three weeks, Asian equities rallied, led by a recovery in technology.  The Hang Seng set the pace with a 1.7% gain, but Taiwan, Korea, and Singapore markets were up over 1%.  The two exceptions were Chinese mainland markets and Australia, which traded heavier.  European markets jumped higher, led by finance, energy, and consumer discretionary.  Optimism that a repeat the Greek tragedy won't play out in Italy is helping lift Italian bank share the most in six months (5%+) and Italian bonds.  Despite the handwringing over last week's poor retail reception, Italian bonds are extending their rally for a fourth consecutive session.  The 18 bp decline today brings the four-day move to almost 40 bp.  Peripheral European bonds are rallying with risk-on, while core bonds are a bit heavier.  Oil prices have stabilized after the dramatic fall before the weekend, while industrial metals have fallen sharply.  The US dollar is trading lower against nearly all the currencies but the Russian rouble.  An escalation of hostilities between Russia and Ukraine will be subject to a UN Security Council meeting today.  Gold is fractionally higher.    

Asia Pacific

Economic data from the region was mixed.  Japan's flash November manufacturing PMI fell to 51.8 from 52.9. This is a two-year low and dampens hopes of a robust rebound following the contraction in Q3 linked to disruptions caused by natural disasters.  It had averaged 52.4 in Q3.  New orders fell for the first time since September 2016.   New Zealand reported a disappointing Q3 real retail sales report.  It was unchanged, while economists had expected a 1% gain.  Singapore reported a 4.3% (year-over-year) surge in industrial production.  Economists had forecast a 2.6% gain after a 0.1% decline in September.  On the month, it rose 2.0%, rebounding smartly from the revised  4.7% decline. 

Local elections in Taiwan delivered the government a setback 14 months before national elections.  President Tsai Ing-wen resigned as chair of the Democrat Progressive Party (DPP).  Following defeats in state elections, Germany's Merkel did the same thing recently--remained head of state while helping to pick her successor as head of the CDU.   The Kuomintang is both more pro-China and socially more conservative than the DPP.  It is not immediately clear which was the most important driver.  Referendum opposing gay marriage won, and a bid to change Taiwan's Olympic name from Chinese Taipei to Taiwan was rejected.  There was the talk of China interference, while domestic issues like the economy and air pollution seemed to dominate the election. 

The dollar poked through last week's highs against the yen to reach JPY113.35.  Resistance is seen in the JPY113.50-65 area.  Intraday technicals look tired in early Europe, and a pullback toward JPY113.00 seems more likely.  The New Zealand dollar was initially sold on the disappointing retail sales report and fell to a nine-day low (~$0.6755) before rebounding.  A move above $0.6820 would likely signal a retest on the recent high near $0.6885.  The Australian dollar held the pre-weekend low (~$0.7220) and is poised to retest the $0.7300 area.  The recent high was set at the start of last week near $0.7330.  

Europe

It has been clear for some time that the UK Parliament would be the biggest hurdle for the Withdrawal Agreement. And that remains the critical issue.  The Democrat Unionist Party, which allows the Tories to govern has indicated its opposition to the agreement.  The EU has made it clear that it was not willing to return to the negotiation table.  Prime Minister May gave in on one more issue over the weekend.  After steadfastly opposing it, May acquiesced and accepted that Gibraltar is excluded from any UK-EU agreement.  Spain and the UK will negotiate directly over the territory, which voted overwhelmingly to stay in the EU. 

There are three basic scenarios for Brexit.  The negotiated plan is approved by Parliament.  This seems unlikely.  The rejection of the agreement could be how the UK backs into the second scenario:  an exit next March without an agreement and about three months to prepare for the chaos that will likely result.  Without the Withdrawal Agreement being approved, there is no transition period. One possible consequence of the rejection of the Withdrawal Agreement is an enhanced chance of a second referendum.  Corbyn seems to first want to see May hung on her own petard before supporting a second referendum, which former Labour PM Blair is advocating.  The odds of a second referendum appear to be increasing, but it may raise more issues than it answers.  What is the legal basis for a second referendum?  Would the outcome be seen as legitimate?  Does it set a dangerous precedent?  What is the choice to voters if Parliament has already rejected the negotiated Withdrawal Agreement?   

Germany's disappointing flash PMI has been followed by a poor IFO survey.  The overall business climate came in at 102, the second lowest for the year, as both expectations (98.7 vs. 99.7) and the current assessment (105.4 vs.106.1) fell.  Germans have not been this pessimistic of the current situation since last September.   The DAX has fallen 10% over the past three months. Merkel's announcement that she will not seek re-election as CDU head may have preempted a messy leadership challenge, but it boosts political and policy uncertainty.  

We are concerned that some may be misinterpreting Italy's Salvini. Many see his comment suggesting he was not fixated on a 2.4% budget deficit, but they are emphasizing his reference that it could be 2.2% rather than that is could also be 2.6%.  What Salvini appears to be saying is that it is not about the numbers, but about the campaign promises--a tax cut, a new assistance program to the poor, and a rolling back of the pension reforms.  There could be some tweaking of the start date of some of the programs, which could make the numbers look a bit better.  However, the risk is that growth is not as strong as the government projects and a smaller denominator will boost the deficit/GDP ratio.  

After closing poorly before the weekend, the euro trended higher in Asia before finding good offers near $1.1385 in the European morning.  A close above $1.1400 and/or an intraday move above $1.1420 would help lift the tone. ECB President Draghi is yet to speak to the European Parliament.  We note that although it is not an ECB meeting, Draghi's press conference after ECB meetings has typically led to a euro decline this year (except in September).  While Draghi will likely confirm the end of the asset purchases next month (though linked to incoming data), he may recognize, as did last week's record of the recent ECB meeting, that growth is weaker than anticipated.  Sterling traded slightly below $1.28 before rebounding a bit more than half a cent. The pre-weekend high was a little shy of $1.2885 and maybe a bit too far today.  In a referendum, the Swiss rejected making national law always superior to treaties, which would have seemed to nullify its international agreements if it had been accepted.  The Swiss franc is little changed against the dollar today but is a little lower against the euro, which held chart support near CHF1.13.  

North America

The week's events begin off slowly, with the Chicago Fed national activity report and the Dallas Fed's manufacturing survey.  Neither is the stuff that moves the capital markets.  Although data due out this week include October income and expenditure reports and revisions to Q3 GDP, the focus is on the Federal Reserve.  In an active week of speakers, Vice Chairman Clarida kicks it off tomorrow, followed by Chairman Powell on Wednesday and the FOMC minutes on Thursday, before NY Fed Williams on Friday.  The regional Fed Presidents Bostic, Evans, George, and Kaplan also speak this week.  The G20 meeting (Nov 30-Dec 1) features Trump and Xi meeting, with lingering hopes of some way to avoid an escalation of trade tensions and the signing of NAFTA 2.0, and perhaps some adjustment of US steel and aluminum tariffs on Mexico and Canada.

The S&P 500 may gap higher at the open.  There is an upside gap created last week that is important from a technical perspective.  It is found roughly between 2670.7 and 2681.1.  A close above it would lift the tone and ward off a test of last month's low a little above 2600.  Meanwhile, the US 10-year yield may be finding a base a little above 3.00%. 

The Canadian dollar is shrugging off news that GM will close a factory in Oshawa, Ontario at the end of next year.  The US dollar found support near CAD1.3180 in the past two sessions, and additional support is seen ahead of CAD1.3160.  The US dollar is a little firmer against the Mexican peso near  MXN20.41.  Border tensions increased, and Mexico has denied reports that it will hold asylum seekers back from the border pending processing by the US.  The dollar has frayed the MXN20.50 level a few times this month but has not closed above it.  

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