Trying to Get One's Bearings

The market is trying to get its bearings today. The large decline in the US equities before the weekend has had modest spillover effects elsewhere.  Equity markets, barring the Shanghai and Shenzhen Composites, are mostly modestly lower.  The MSCI Asia-Pacific Index is off about 1% while the Dow Jones Stoxx 600 is less than 0.5% lower in late-London morning turnover.  

Iranian oil sanctions were lifted.  Oil prices are off a little more than 1% today, with Brent and WTI briefly slipped through $28 a barrel level before recovering.  Iranian banks are back on SWIFT.  Several European companies have indicated readiness and desire for commercial links.  Still the sanction-environment is far from clear.  Reports indicated that while 86% of the Iranian entities on the UK's sanction list will be lifted while only 68% on the US OFAC (Office of Foreign Assets Control) sanction list will be removed.  

Iran is thought to be able to supply 500k barrels of oil a day, nearly immediately.  In the next few months, it hopes boost output another 500k barrels a day.   This, coupled with resilient output in the US (inventories at Cushing are at record highs), post-Soviet Union record high Russian output, and the continued strong OPEC output weighs on sentiment.  As prices drop toward $25 a barrel, there is increased talk of an emergency OPEC meeting (more likely it seems, next month rather than in the next two weeks), with some non-OPEC producers suggesting possibility of reducing output.  

Before the weekend, S&P surprised investors by cutting Poland's rating.  A Reuters poll the day before ad about 30% of those surveyed expected S&P to downgrade the positive outlook.  Instead, after keeping Poland's credit rating a A- since 2007, S&P cut it to BBB+ and gave it a negative outlook.  The main reason it cited was that the new government's action have threatened the institutional independence.  The same issue lies at the heart of the EU opening an unprecedented inquiry into Poland's democratic commitment.  

While the zloty is little changed on the day, after having sold off before the weekend, Poland's creditors are responding for the first time.  The yield on the 10-year benchmark is up 20 bp to 3.16%, while the 2-year yield is six bp higher at 1.45%.  

Over the weekend was the PBOC's decision as of later this month raise the required reserve ratios to foreign banks with yuan deposits in the mainland.  Last year, foreign banks for formally included in the RRR system but were assigned zero requirement.  The move is meant to make it more difficult for clearing banks to facilitate the shorting of the yuan offshore.  

China is using both carrot and stick means to take pressure off of its currency.  Far from seeking to drive it lower, as many of the critics who cry "currency war"  claim, China it trying to prevent or, at least, slow the depreciation of the yuan, which may also be key to keeping the onshore and offshore yuan aligned.   Last month, it appears the PBOC appears to have burned through more than $100 bln trying to stabilize the yuan.    There some signs that it is beginning to find traction.  After having its best week in several months last week, the offshore yuan continued to be squeezed higher today.  It rose by about 0.25% while the onshore yuan rose 0.09%.  

There was no immediate market fallout from the results of the weekend election in Taiwan.  For the first time since 1949, the Kuomintang lost its majority in parliament and, as widely anticipated, Tsai Ing-Wen, from the Democratic Progressive Party, become the first woman President.  The campaign appeared to be largely waged over relations with China, and the DPP were critical over the closer ties that the KMT pursued.    Taiwanese share closed about 0.6% higher (in comparison South Korean shares advanced by 0.25%).

Our interpretative point that at the moment the US dollar appears to be more a fulcrum than a driver seems broadly fair assessment of today's price action.  The currencies that were out of favor last week, like sterling, and the Canadian and Australian dollars are posting modest gains, while those currencies, like the yen, euro, and Swiss franc, which firmed last week, are trading somewhat heavier today.    

Of note, coming into today’s session, the Canadian dollar was nursing an 11-session losing streak, its longest in the floating era.  The central bank meets in the middle of the week, and many expect a 25 bp rate cut.   The US dollar initially rallied to CAD1.4660 before reversing lower.  A US dollar bearish shooting star candlestick pattern appears to have been traced out.  The first target is near CAD1.4435.

Many emerging market currencies are also getting a reprieve from the selling pressure.  However, with nerves shot, the US on holiday, and the serious technical damage, it will take some time to rebuild risk appetites.  

Tomorrow the UK reports December CPI figures and BOE Governor Carney speaks on the UK economy for the first time this year.   The ECB meets Thursday.  The price of Brent has fallen by more than a third since the ECB met in early-December.  This will impact the projections of the Survey of Professional Forecasters, which in turn will be part of the case that Draghi will build that, the ECB remains bound by law to take more action, if necessary.   A Bloomberg survey found 60% expect the ECB to do more this year.  This is up from 40% last month.  We have penciled in additional measures around midyear.  

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