Fragile Monday

The major currencies are consolidating, but many of the emerging market currencies, including the South African rang, Turkish lira, Indian rupee, Russian rouble, Polish zloty and Hungarian forint remain under pressure.  

Asian equities followed the US pre-weekend slide, and European bourses are also playing a little catch-up.   The early call is for a steadier to higher opening on Wall Street. 

The US Treasury market is also showing a nervous calm, with 10-year yields up almost 3 basis points in Europe, yielding near 2.75%.  European yields are slightly higher.  We note that the local currency bonds in most emerging markets are also higher, though the Philippines and China are the exceptions.  

There are three developments to note.  First, Japan reported a somewhat larger than expected unadjusted trade deficit of JPY1.302 trillion in December.  For the year as a while, Japan posted a record JPY11.47 trillion trade deficit, not simply despite, but rather because of yen depreciation that boosted the value of imports more than Japanese businesses were able to boost exports and export prices.  

Both exports and imports grew more slowly than expected in December.  Exports rose 15.3% year-over-year, down from 18.4% in November.  The consensus had expected an increase of 18%.  Note that exports to China rose by 34.4% from a year ago and Exports to the US rose a little more than 13% from a year ago.  Imports continued to grow, but not as fast the as the consensus expected.  Imports rose 24.7% in December, up from 21.1% in November, but not the 26.2% the market expected.  

Separately we note press reports indicate that the US is pressing the Abe government to commit to no more controversial shrine visits and to affirm apologies for historic action in a bid to calm tensions over disputed islands.  Rhetoric in Davos seemed to intensify rather than de-escalate strains.  

Second,  fear over the possible default of a Chinese wealth management product (Chinese Credit Trust) has been allayed to some  extent by what appears to be a facing saving measure that allows the principal to be recouped but some of the 10% yield has to be forgone.   The trust was backed by loans to a coal miner that failed.  

Early reports that suggested that the PBOC had moved to deter banks from making cash transfers for a few days and foreign currency transactions for a bit longer was taken down from the Forbes web site, where the claims emanated. 

Third, in Europe, the main data highlight was the German IFO survey.  Business conditions rose to 110.6, the highest in 2.5 years, above expectations (110.0) and improvement from the 109.5 in December.  The current assessment improved, in line with expectations to 112.4 from 111.6.  Expectations rose more than anticipated (108.9 instead of 108.0 and up from 107.4 previously).  The data underscore the renewed strengthening of the German locomotive and suggests the new year is off to a strong start.  

Draghi has indicated that he would be prepared, if necessary, to have the ECB buy packages of bank loans to households and businesses.  This would seem to indicate that the calls for a small (10-15 bp) cut in the repo rate is unlikely.  We have seen the ECB as more interested in addressing the collapse of bank lending than simply lowering the price of money.  

We have argued in favor of helping to facilitate more activity in the asset-backed securities market.  We had thought this could take place through collateral rules.  Draghi's suggestion goes a bit further.  Still, while this course seems more likely than what we have deemed the nuclear options of buying sovereign bonds and cutting the deposit rate below zero, officials seem in no particular hurry.  In fact, the ECB's Knot suggested that it would take an new adverse shock to spur additional official action. 

Lastly we note that the Turkish central bank announced an extraordinary meeting for tomorrow.  The initial reaction was to fear the rate hike than arguably should have been delivered last week.  It is helping the lira stabilize.