Christmas Eve Market Update

Overview:  The holiday has already shut several markets, and those that are open are lightly traded.  Equity markets are mixed but little changed in the Asia Pacific region while the European benchmark, the Dow Jones Stoxx 600, was hovering around the record high.  Benchmark bond yields are slightly softer.  The US dollar is showing a firmer profile against most of the major currencies, but the Norwegian krone and Swedish krona had resisted the pull to edge higher.  The JP Morgan Emerging Markets Currency Index has slightly higher for the second session.  Gold has quietly taken out a three-month downtrend that was found near $1480 and is moving within striking distance of $1500.  Oil is consolidating its recent gains, and the February WTI contract held support near $60 a barrel.  

Asia Pacific

Beijing seems to move between deleveraging and strengthening growth, and as the year winds down, it seems to have moved to the latter. The Japanese economy was hit with a double whammy of the tax increase and tsunami.  The body blow appears to be easing though the economy may be contracting by about 0.5% this quarter.  India's economic growth has slowed considerably, and ironically the problem emanates from one of the same areas that challenged China, shadow banking sector.  The demonstrations across India have seen more deaths in a couple of weeks than in the months of protests in Hong Kong.  South Korea's recent export figures for the first 20 days of December are promising.  Exports were off 2% from a year ago and 8.1% above the first 20-days of October.  Exports to China were up 5.3%, and December will likely be the first month in more than a year that shipments to China rose.  Exports to the US fell by 3.4% but rose 6.2% to Japan.  Semiconductors, which are South Korea's largest export, were off 17%, which represents a modest improvement compared with recent months.  Imports fell 0.5% from a year ago and rose 9.1% from a month ago.

The dollar has been confined to about a five tick range around JPY109.40.  There are two option expirations today to note.  Both are for $390 mln.  One is at JPY109.40, and the other is at JPY109.55.  The Australian dollar closed yesterday above its 200-day moving average (~$0.6905) for the first time since March 2018.  The holiday has sapped the buying enthusiasm, and the recent high near $0.6940 remains intact.  The Chinese yuan recouped yesterday's minor loss, and the dollar held above CNY7.0 in uneventful turnover.   A poor showing by Modi's BJP  in a state election (Jharkhand) seemed to weigh on the rupee.  It is the second state election lost in recent months after Modi won a second term back in May.  Protests against his new citizenship initiative are widespread and have resulted in 24 deaths.  

Europe

Before the weekend, the euro had slumped about $1.1065 after holding above $1.11.  The lack of participation kept it pinned near the lows yesterday, and it remains near there today.  Like yesterday mild selling pressure was seen near $1.1095.  In the thin markets, the risk may extend toward $1.1050 in the coming days.  Sterling finished last week a touch below $1.30, and yesterday's brief foray above there brought in new selling.  It reached almost $1.2900 yesterday.  Today it has not been above $1.2950.  Recall that in three weeks through December 17, speculators in the futures market increased their gross long sterling position by 21k contracts to 59.3k.  It was the largest since September 2018. We suspect that the bulls have pared their positions amid the buy the rumor sell the fact activity since the election.  Sterling returned to the $1.28-$1.30 band that persisted from mid-October through late November.  

America

Conventional wisdom sees the US trade agreement with China, as lifting uncertainty that has cast a pall over both economies.  It seems exaggerated.  As we suggest above, Beijing bounces between encouraging de-leveraging and promoting growth and had shifted toward the latter.  Yesterday's durable goods orders report showed that the deal in October failed to bolster capital expenditures in November.  The 2% decline in the headline rate was greater than anyone forecast in the Bloomberg survey and the most in six months.   The headline decline was exaggerated by a huge (more than 35%) drop in military orders.  Excluding defense and transportation, durables goods orders rose by 0.1%.    A key component for GDP calculation is the shipment of capital goods excluding aircraft and defense, and it fell 0.3%.  To add insult to injury, the October series was revised lower.

For the second time, the Fed's term repo that covers the turn of the year was undersubscribed yesterday.  Banks took $28.8 bln of the $35 bln the Fed offered.  Nevertheless, some pressures remain and can be seen in the year-end repos that remain elevated.  Separately, the overnight repo also was undersubscribed.  In fact, the $20.5 bln (of $120 bln offered) taken by the banks was the least in the three months that the Fed has been conducting overnight repo operations.

Argentina was in technical default for a day, according to Fitch, which raised its rating to CC.  The idea is that once a new payment schedule was made, the "distressed debt exchange" was completed.  This is a repeat of what happened in August, except that S&P continues to hold a 'selective default" rating.  While the government may have bought some time, it looks limited as the next year's maturities are lumpy with $25 bln (of ~$65 bln) coming due in Q2.

The North American economic calendar is light today, and US markets close early.  The Richmond Fed reports its December manufacturing survey.  For the past five months, it has been alternating between gains and declines.  It fell from 8 to minus 1 in November and is expected to edge up to +1 in December, keeping the pattern intact.  Of three Fed surveys already released, the Philadelphia and Kansas surveys weakened.  The Empire State survey rose (to 3.5 from 2.9) though it was less than expected.  Mexico reports its November unemployment figures, which are expected to be little changed.  The central bank signaled that barring new shocks, it is prepared to cut rates again early next year.

Canada's monthly GDP print disappointed yesterday with a 0.1% contraction in October. The US dollar is carving out a small shelf near CAD1.3140.  It needs to rise above CAD1.3180 to be anything important.  The greenback has lost the downside momentum seen earlier this month against the Mexican peso but continues to trade in the trough.  It has resurfaced above MXN19.00 once in the past six sessions.  Support is seen in the MXN18.89-MXN18.90 area.   

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