Mnuchin Double Checks, Some Scoff but US Shares are Higher

Overview:  It is not the eggnog or rum balls giving traders indigestion on Christmas Eve, but disruptive impulses from the US.  Treasury Secretary Mnuchin tried to put to rest reports that President Trump wants to fire Federal Reserve Chair Powell.  Mnuchin indicated that the President recognizes legal limitations.  The US Treasury Department also reported that the Treasury Secretary initiated a call to the largest banks and was assured liquidity was ample and that there was no disruption in trade despite the precipitous decline.  Mnuchin also plans on talking with Working Group for Financial Markets, which includes the Fed, the SEC and CFTC and has been dubbed the "Plunge Protection Team" by the more conspiratorial-minded.  Mnuchin's moves seemed like an exaggerated response and were widely scoffed at in the social media, but US shares are trading higher.   The partial US government shutdown has entered its third day and no end is in sight. Global equities are mixed and benchmark 10-year bond yields are little changed.  The US dollar is trading heavily against the major and most emerging market currencies.  

Asia Pacific

Equities in the region were mixed, while Tokyo markets were closed. China, Australia, Singapore, Indonesia, and Thailand markets posted modest gains, while the other markets, including Korea, Taiwan, India, and Hong Kong fell.   The rupee, the offshore yuan, and the Thai baht rose about 0.25%, while most of the other regional currencies were slightly lower, with the Korean won off a quarter of one percent as the laggard.  The Australian dollar is the strongest of the majors, up about 0.3% as it consolidates the steep pre-weekend decline.  The dollar remains pinned in the trough seen last week against the yen where three-month lows near JPY110.80 were recorded.  The greenback has largely been confined to a ten-tick range either side of JPY111.00 today.  

The main development came from China. Reports indicate it will take fresh trade initiative starting January 1 that will reduce tariffs on some 700 goods imports, with some set temporarily at zero.  It will also cut export tariffs on nearly 100 items, including fertilizer, iron ore, coal tar, and wood pulp.  The move appears to have three objectives.  First, seek to minimize the risk of an escalation of trade tensions with the US.  It is the third round of tariff reductions this year.  Second, begin putting a wedge between those who demand that China adhere to the trade rules and those that want to contain China's rise and even seek regime change.  Third, stimulate the domestic economy without boosting debt.  

 Europe

Several European markets are closed today, including those in Germany, Italy, and Switzerland.  Those that are open are nursing small losses.  The Dow Jones Stoxx 600 is off about 0.5%.  All the major sectors are off, with communication, consumer staples, and financials leading the losses.   Debt markets are quiet though Gilts are firm.

News from Europe is light. Italy's Senate passed the revised budget and the Chamber of Deputies are expected to also approve it shortly.  Behind the scenes maneuvering in the UK as 10 Downing Street seems to think it can still win the vote in Parliament in about three weeks on the Withdrawal Bill.  Since late November, the wagers at PredictIt.com have favored a scenario in which the UK does not leave the EU at the end of next March.  It is now about 60-40 in favor of no Brexit.  

The euro and sterling are consolidating in dull dealings.  They enjoy firmer profiles.  The euro has gently firmed over in Asia and Europe.  It will likely meet resistance in the $1.1420-40 area, below last week's highs near $1.1485.  Support is seen in the $1.1350-60 area.   Speculators in the futures market are net short around 53k euro contracts.  The largest for the year was seen earlier this month a little below 61k contracts.  Sterling is inside Friday's range, which was inside Thursday's range.  Last Thursday's, sterling traded from a little above $1.27 to a little above $1.28.  The triangle pattern that it appears to be tracing out is mostly seen as a continuation pattern, which in this context would be constructive for sterling.  The panic that sucked it below $1.25 subsided.  Despite intraday penetration, it has not closed above its 20-day moving average since mid-November.  It is found near $1.2675 today.  Speculators in the futures markets are net short about 61k sterling contracts.  The year's largest net short was recorded in September near 80k contracts. It has fallen to 40k at the end of November.  

North America

The fact that investors are discussing the legal power of the US President to fire the Federal Reserve Chair and the possible consequences may be a very apropos way to end this kind of year.   The last word, and it has come via Treasury Secretary Mnuchin rather than the President directly is that Trump understands he does have the power to fire Powell.  There are many economists and investors who share the President's frustration with the Federal Reserve's rate hike.    No doubt the sell-off in the stock market is a cause of much consternation for a President who previously evaluated himself by its performance.   Many, if not most narratives have tied the equity market losses to monetary policy, but this may not pay enough due to trade policy.  In the 13 sessions since the "Tariff Man" tweet, the S&P 500 has lost a little more than 13%.  Say what one will about last week's rate hike, but the world's largest economy is not so fragile and the settings of monetary policy are not so precise that will push the economy over the edge.  Bloomberg survey puts a median assessment of a 20% chance of a US recession over the next 12 months.   It was this high in June 2017 and most of 2016. 

The Canadian dollar is consolidating after falling to 18-month lows before the weekend.  After surging to CAD1.36, the US dollar can pull back to CAD1.35 without doing much technical damage.  The general US dollar and equity market direction probably knocks the Canadian dollar around over the next few days.  The speculative net short position in the futures market has fallen in recent weeks as bottom pickers (new gross longs) have come in, while the bears (gross shorts) have been gradually extending their position.  Investors are not responding negatively to Mexico's infrastructure initiative (rail, refineries, and ports) that will be solely funded by domestically.  The peso is consolidating last week's gains, when the dollar found support near MXN19.80. The peso is one of the best performing currencies this year, losing 1.2% against the US dollar.  

Disclaimer