Overview: The surging Covid cases in China and the protests in several cities seemed to set the tone for today’s session. Equities are lower. China, Hong Kong, Taiwan, and South Korea were marked down the most. Of the large bourses, only India escaped unscathed. Europe’s Stoxx 600 is off more than 0.8% and US futures are poised to gap lower. Bond markets are quieter. The 10-year US Treasury yield is off a little more than one basis point to around 3.66%. European benchmarks are mostly firmer, and peripheral spreads are a few basis points wider. The US dollar began off stronger, but now only the dollar bloc among the majors is weaker. The euro rose through the recent high to edge closer to $1.05. Among emerging market currencies, central European currencies are leading. China, Taiwan, and South Korea, join Russia with the largest losses. Gold is trading near a six-day high and reached almost $1764. Demand concerns and Europe’s inability to agree so far to a price cap for Russian oil have pushed January WTI below $75 a barrel for the first time since mid-January. February Brent is near $81. It had briefly traded below $80 in late September. US natgas is off 5.75% after falling almost 4% before the weekend. Europe’s natgas benchmark is off 5.2% after rallying more than 25% over the past two weeks. Iron ore fell almost 1% today. It offset last week’s 0.55% advance, which was the fourth consecutive weekly rally, during which time it had surged by nearly a quarter. March copper is off about 0.5% to give back a little more than it had gained before the weekend. Lastly, March wheat has fallen in seven of the past eight weeks and starts this week with a loss of nearly 1%.
Asia Pacific
It is difficult to know what to make of the protests in China. The
deadly fire in Urumqi last week, blamed on zealous local authorities, seems to
have been the spark. The kindling is the rising Covid cases in China, the
slowing economy, popular discontent, and pent-up frustrations
Demonstrations took place in several cities, but might not be a
"nationwide movement" as some in the media claim. Calls for Xi to step
down and criticism of censorship suggest underlying frustrations.
Paradoxically, the more profound the challenge (which is the hope of many), the
more possible repression. At the same time, Beijing may align with the people
against the overzealous. China needs to buy
some time if it is going to make a significant change in its Covid policy
stance. It needs to construct emergency medical facilities, boost the
vaccination rate, and import mRNA vaccines, which Beijing already accepted
making one available to foreigners. We are skeptical that the property measures
will be sufficient and see the surge in Covid making us even more suspicious. Similarly,
last week's 25 bp cut in reserve requires (worth ~CNY500 bln or ~$70 bln) is
going to be lost amid the continued surge in Covid cases.
In Japan, the unexpected contraction in Q3 GDP was followed by a
surprisingly weak preliminary PMI. Weakness in manufacturing (two-year low)
and falling new orders saw the composite drop below the 50 boom/bust level to 48.9
from 51.8. Despite the acceleration of Tokyo's November CPI, the subdued wage
growth and weakness of the economy underscore the importance of accommodative
fiscal policy and the extraordinary monetary policy. The key to the exchange
rate still seems like US Treasuries. As we have noted, the rolling 30-day
correlation of changes in the exchange rate and changes in the 10-year US
Treasury yield is at its highest this year (~0.71).
Australia reported that October retail sales fell by 0.2%. The
median forecast in Bloomberg' survey looked for a 0.5% increase and no forecast
anticipated a decline, the first of the year. The decline was seen in all
sectors but food retailing. Still, in absolute terms, the October sales were
the second highest on record. Still, it seems clear that the Australian economy
is slowing, and the preliminary November PMI stood at 47.7, the second
consecutive month below the 50 boom/bust level and the lowest since January. The
first thing Wednesday, Australia reports its new monthly CPI series for October.
New cyclical highs are expected (7.6% at the headline level, up from 7.3%, and
5.7% trimmed mean vs. 5.4% in September). The futures market has about 2/3 of a
chance of a 25 bp hike on December 6.
The yen strengthened to its best level since late August today. The
dollar has stalled slightly above JPY139.50 ahead of the weekend and was sold
below JPY139 in Asia. It did not find a bid until JPY137.50 in the European
morning. It looks like the move may be exhausted but re-establishing a foothold
above JPY138.50 may be necessary. Meanwhile, three-month implied volatility
peaked last month near 14.8% had fallen to 11% but is poking above 13% today. Chinese
developments are taking a toll on the dollar-bloc currencies and the Australian
dollar is the weakest. After settling near $0.6750, the Aussie was
sold to almost $0.6665 today in the Asia. It recovered to reached $0.6715 in
the European morning before news sellers emerged. There are options for nearly
A$770 mln at $0.6700 that may have added to the selling pressure when the
Australian dollar fell through it. The inability to take out $0.6800 last week
leaves a potential double top, with a neckline around $0.6600, where the 20-day
moving average is found. The dollar gapped higher against the Chinese
yuan and rose to CNY7.24 before reversing and falling below CNY7.20. The
gap extends to the pre-weekend high slightly above CNY7.1800. The PBOC set the
dollar's reference rate at CNY7.1617 compared with the median in Bloomberg's survey
for CNY7.1715. The dollar reached almost CNH7.26 against the offshore yuan. It
had settled near CNH7.1940 before the weekend. It is around CNH7.2130 in late
in the European morning.
Europe
The cap on natural gas prices announced last week would only be invoked
in extreme circumstances, so extreme that the events earlier this year would
not have triggered them. Europe could not agree on a meaningful price cap
on Russia's oil, which will be banned in any event in Europe after December 5,
with some latitude provided when the oil is loaded and unloaded. Poland and the
Baltics led the charge for lower than $65 barrel, while others, including
Greece, did not want it to be lower than $70. Part of the challenge is that
some Russian oil, like the Urals benchmark, was selling for $52 a barrel last
week, according to reports. Talks resume today.
Prime Minister Sunak won not one but two leaderships contests in
Parliament this year. Yet he faces the same problem as his recent
predecessors, the Conservative are deeply and numerously divided. Growth and
disparity issues could be addressed by construction of new homes, but the government's bill was stalled in Parliament with many Tories defected.
Immigration by some Tories to minimize wage competition, but reduced
immigration was supposed to have been made possible by Brexit in the first
place. Last week, Johnson and Truss joined others in Parliament to overturn the
existing ban on land-based wind turbines.
Money supply, M3 slowed dramatically in October to 5.1% from 6.3%, and
much more than expected (6.1% median forecast in Bloomberg's survey). It
is the slowest annual growth rate since the end of 2019. Loans to businesses
was steady (8.9%), while lending to households slowed to 4.2% from 4.4%. The highlight
of the week is preliminary November CPI on Wednesday. The headline rate is seen
slowing slightly to 10.4% from 10.6%, while the core is expected to be steady
at 5%. Meanwhile, the swaps market is nearly evenly divided over the outlook
for the December 15 meeting between 50 bp and 75 bp.
As seen after the missile hit on Poland, the initial loss in the euro was
snapped up, and it happened again. Chinese developments initially saw the euro
fall half a cent from the close slightly below $1.04. It fell through the
pre-weekend low to a three-day low (~$1.0340) and surged from around $1.0370 to
$1.0480 in the European morning. Last week, it did not trade over $1.0450. The
high, here in H2, was set on November 15 slightly shy of $1.0480. The impulsive
nature of the rallies, while the downticks have been choppy is notable. To
confirm an outside day, the euro needs to settle above Friday's high (~$1.0430).
Sterling's price action is not quite as impressive. It also fell to a
three-day low near $1.2025, and while it has recovered it has held below the
pre-weekend high (~$1.2130). While the euro has traded on both sides of its
200-day moving average (~$1.0385) today and over the past two weeks, sterling
has not. Its 200-day moving average is slightly above $1.2175.
America
The market and the media like drama and insist the FOMC minutes were
dovish, or that there is a spilt between the hawks and doves. Pshaw.
There seems to be a broad consensus favoring a downshift to 50 bp at next
month's meeting. Remember this was what the median Fed dot in September
suggested would be appropriate. The fact of the matter is that financial
conditions have eased, and the drama provides a narrative. We suspect there
will not be dissent if the Fed delivers a half-point hike in December. A
half-point hike cannot be considered dovish or a key fissure at the FOMC. No
Fed official has intimated they want to pause now or that the mission has been
accomplished. Given the easing of financial conditions, Chair Powell will
likely sound a hawkish note when he speaks Wednesday. Recall that market wanted
to read the FOMC statement earlier this month and Powell corrected it. Redux?
The busy week features the US employment data being with the Dallas
Fed manufacturing survey and speeches by the Fed's Williams and Bullard. Canada
reports its Q3 current account balance. It is expected to have swung into
deficit, which will likely offset most of the C$5.3 bln surplus seen in H1.
Tomorrow Canada reports September and Q3 GDP. Growth is expected to have slowed
to around 1.5% in Q3 from 3.3% in Q2. The Bank of Canada meets on December 7,
and the swaps market has a little less than a 60% chance of a 50 bp hike
discounted.
Separately, ahead of the weekend, Mexico reported Q3 GDP expanded by 0.9%
and 4.3% year-over-year. We have drawn attention to worker remittances,
which have more than offset the trade deficit. Looking closer at its trade, we
note that exports in September for up a quarter year-over-year and around 80%
are headed to the US. Vehicles and computer parts shipments each were about
$4.7 bln. Mexico reports October's trade balance today. The trade balance often
deteriorates in October (16 of the past 21 years) and this year is not expected
to be an exception. The central bank of Mexico is widely expected to continue
to match the FOMC, and this means 50 bp next month and 50 bp in the first part
of next year. The peso's volatility has fallen, and this makes the carry-trade
attractive. The 200-day moving average of the benchmark three-month implied
volatility is a little above 12% and it is near 11.25% now. This is lower than
the implied volatility of most G10 currencies, but the euro, Swiss franc, and
Canadian dollar.
Brazil cannot get out of its own way. The new government has not
eased investors' concerns about its fiscal intentions, and many fund managers
appear overweight. Haddad, the former mayor of Sao Paulo, is seen as the likely
finance minister, continued to press the case but seemed more flexible on tactics.
Bolsonaro's effort to annul votes was rejected by the electoral court. It ruled
Bolsonaro was acting in "bad faith" and fined the parties in his
coalition BRL23 mln (~$4.3 mln).
The greenback found support in the last two sessions last week around
CAD1.3320, a little below the (61.8%) retracement target of the run-up since
the November 15 low near CAD1.3225. The initial risk-off reaction in
the Asia Pacific time zone saw the US dollar jump to almost CAD1.3475. Subsequently,
it has drifted lower and is near CAD1.3430 in the European morning. There may
be scope toward CAD1.3380-CAD1.3400 in the North American morning. The
dollar posted an outside down day against the Mexican peso before the weekend and
set new lows for the week (~MXN19.3065). It remains pinned there today and
has not been above MXN19.3650. On November 15, the greenback recorded its low
since March 2020 near MXN19.25. Before Covid stuck, the dollar was trading
below MXN19.00 in late 2019.
Disclaimer
Reviewed by Marc Chandler
on
November 28, 2022
Rating:
