Dollar Firm in Still Holiday Thinned Activity

The capital markets remain thinned by the holiday, but some light profit-taking is the main feature of the first session in 2014.  The euro and sterling are heavier following PMI manufacturing reports.   Many emerging market currencies remain under pressure, including the Turkish lira, which is at new record lows. 

Equity markets are mostly lower.  While Japanese markets are still closed, most of the Asian equity markets slid.  Ongoing political concerns saw Thailand's SET dump 5.2%, extending the sell-off to 17.6% since mid-October.   Foreign investors sold about $1.3 bln of Thai shares in December.  The baht fell for the 11th session, losing about 0.75%.    

Korea's Kospi posted the second largest loss in Asia with a 2.2% decline.  The main driver appeared to be cuts in Q4 earnings outlook for automakers and some electronic firms.  Foreign investors were net sellers of almost $300 mln of Korean equities.  For its part though, the won actually strengthened by about 0.5%.  

China's manufacturing PMI was a bit disappointing.  The official measure showed a slight easing to 51.0 from 51.2, while the final HSBC measure confirmed the flash at 50.5.  Of note, its export measure fell to new 4-month lows at 49.1.  

European PMIs were the main driver behind the heavier tone among the European currencies.  The euro area manufacturing PMI was in line with the flash reading of 52.7 and is the best in 2.5 years.  There are three bright spots:  Germany, which was upgraded by 54.3 from 54.2 in the flash, showing the euro area economic engine motoring along, Greece, which reached at 4.5 year high of 49.6, and Italy, which reported a 53.3 reading (vs 52.4 in Nov) to nearly 3-year high.  

There was one major disappointment:  France.  At 47.0, the French reading is just below the 47.1 flash, but is off from 48.4 in November, to a 7-month low.  With recovery in the periphery, France has become the weak link.  Although the French interest rate premium over Germany has not widened today, the 10-year premium has increased by 18 bp over the past month to 62 bp. 

The UK  manufacturing PMI was somewhat disappointing as well.  It slipped to 57.3 from 58.1(revised from 58.4).  New orders slipped, but remain elevated at 60.4 (from 63.9, revised from 64.6) and notably, the employment index improved, suggesting the UK economy still enjoyed good momentum into the end of 2013.   In Asia, sterling briefly traded above $1.66, to record a new 2-year high.  Following the PMI, sterling found support near $1.6640. 

The lack of liquidity more than news appears to be behind the Norwegian krone's 1% slide today.    It seems to have been dragged down by the Swedish krona, which is off about 0.65%, on the back of a disappointing manufacturing PMI.  The PMI came in at 52.2 from 56.0 in November and a consensus forecast of 55.2.  Production, orders and employment fell.  Yet, we note that Sweden's manufacturing PMI has been alternating between a low 52 reading and 56 reading for the last five months ( 52.2, 56.0, 52.0, 56.0, 52.2). 

The North American session features the weekly initial jobless claims (likely skewed by the holiday), the final PMI and ISM reports.    Note that emergency jobless benefits also expired.   

US 10-year yields are trying to establish a foothold above the 3% threshold.  Meanwhile, the rally in the peripheral European debt continues.  The Italian 10-year yield is flirting with 4%, a level not seen in nearly 8 months.  The biggest move though is in the shorter durations with the 2-year yield slumping 17 bp to dip below 1.1% and is approaching the multi-year low set last May just below 95 bp.  The Spanish 2-year yield is off 17 bp, toying with record lows.