Three Developments in Thin Markets

Market participation has been thinned by the approaching New Year.   This is making for some choppy price action.  The result is weaker equity markets and a softer US dollar.  The greenback is lower against the euro and sterling.  Sterling held just above $1.55 in Asia before recovering a bit in Europe.  The euro slipped to a new low of $1.2125 in Asia before steadying in Europe, and recovered toward $1.2185.  The biggest mover was the yen. The dollar hit an air pocket and slid to JPY119.20 before recovering back to JPY119.80 in Europe, but it is not clear that the move is over.   The dollar-bloc is slightly firmer, as are the Scandi's, which are also gaining on the euro today.

Oil is extending   its losses.  Despite the decline in oil prices, the Russian rouble continues to stabilize, though in still large intra-day swings.  Bond markets are mixed. Greek bonds remain heavy, especially at the short-end, while other peripheral bond are firmer.  Core bonds are a touch weaker.  Equity markets are  heavy.  The MSCI Asia Pacific Index was off about 0.6%, while the Dow Jones Stoxx 600 is off 0.6%, with losses by energy and telecoms.

There are three developments to note:

1.  Spain reported horrific CPI data. Under the harmonized methodology, Spain's inflation plunged to -1.3% from -0.4% in November.  The consensus had expected some deterioration, but nothing on this magnitude (Bloomberg consensus was for -0.7%).  This will only serve to harden expectations for sovereign bond purchase scheme from the ECB meeting on January 22.  This could be three days ahead Greek election.  At the same time, the deflationary spiral that is supposed to encourage households to defer consumption is not taking place.  Spanish retail sales jumped 1.9% in November, which is more than twice the consensus had anticipated, and follows a 1.0% rise in October.  

2.  The ECB reported that money supply increased in November at a 3.1% year-over-year pace. This is the first print above 3% since April 2013 and is above the consensus for a 2.6% pace.   The contraction in private sector loans continues to diminish.  It fell by 0.9% year-over-year, from -1.1% in October.  The movement is in the right direction, but the pace remains disappointing.  Those advocating sovereign bond purchases are not going to be swayed otherwise by today's report.  

3.  China's SAFE has announced a new initiative that eases bank rules on foreign exchange holdings, which will allow them to reduce their dollar holdings.  This saw the yuan rise by the most in more than six months (0.32%).  Essentially, Chinese officials lifted the loan-deposit cap on net currency positions and will reduce report frequency to weekly from daily.   Some banks reportedly reduced some of their now excess dollars.  Chinese bank estimates suggest several billions of dollars can be sold.  Recall in May 2013, China had ordered banks to adjust their foreign exchange exposures so as to avoid significant mismatches with foreign exchange loans.  This encouraged them to buy more dollars when the yuan was strengthening.  The rules change show that officials are less concerned about capital inflows, perhaps indicating that China may still be experiencing capital outflows.