Dollar Mixed, Sterling Pressured, Yen Strengthens

The weekend did not prove to be the circuit breaking many had hoped for.  While Asian equities fell in the wake of China's PMIs, though its markets are closed for the New Year holiday.  The Nikkei was off almost 2%, to bring its loss this year to a bit more than 10%, which is what is often regarded as a correction.  Ironically, the correction we had anticipated ahead of the doubling of the capital gains tax on January 1 (20% from 10%). 

European bourses are lower but are coming back.  Of note, Italy, the only major European bourse higher for the year is the hardest hit.  Core markets are a little lower, while periphery bond markets are showing continued strength and premiums over Germany continue to be reduced.  

Sterling is the weakest of the major currencies.  The manufacturing PMI came in a bit softer than expected at 56.7 from 57.2 in December.  The details did not look as disappointing, but the market took it as an excuse to cut back on longs.  There is some unconfirmed talk of reserve bank sales.  Sterling has slipped to new 2014 lows against the euro, which is counter-intuitive given the risks of ECB surprise later this week.  

The euro area PMI was upgraded from the flash reading to 54.0 from 53.9.  It is the highest since May 2011.  German and France were tweaked higher from the flash reading, but the real stand out today was Spain where the manufacturing PMI jumped to 52.2 from 50.8.   In contrast Italy edged low to 53.1 from 53.3.  The general impression that Spain is preferable over Italy is reinforced by this data.  Although France showed improvement from the flash 48.8 reading to 49.3, it is the only country in the euro area of note that is below 50.  

The dollar slipped to JPY101.67 before stabilizing, helped by the gains in the S&P 500 in electronic trading.   Support is seen in the JPY101.50-60 area.   Although, we show the yen is more correlated with the S&P 500 than the Nikkei, we suspect the yen bears will wait for some greater evidence that the Nikkei has bottomed before make a big stand.  

In general, we look for a consolidative North American session.  We suspect that ahead of the two big event risks of the week, ECB meeting and US jobs data.  That said, favored by growth differentials, we think the US market is key for when the corrective phase ends.   We do not expect the US ISM/PMI data to provide much in the way of fresh trading incentives.  After strong H2 2013, the US economy is likely to slow here in Q1 and the January data may be skewed by weather considerations. 

(In London this week.  Updates may be sporadic.)