Falling Stocks and Yields Drag Dollar Lower

Many markets are closed in Asia, and although Tokyo managed posted equity gain, most other markets in the region that were open fell.  And the selling pace picked up in Europe.  The Dow Jones Stoxx 600 is off 2.3%, led by information technology, industrials, and consumer discretionary.     It is trading at new lows since late-2014.   It is the sixth consecutive losing session, which is the longest such streak in seven months.  

 Rather than a new trigger, the equity losses today seem to be a continuation of what investors have been experiencing.  The same is broadly true of the bond market.  Core bond yields, including US Treasuries, bunds, and gilts are seeing a 2-5 bp decline while peripheral European bond yields are increasing.  Aside from Greece, where negotiations over the first review, Portuguese bonds have come under strong pressure.  The nearly 15 bp rise in the 10-year yield sees the premium over Germany widen beyond 300 bp for the first time since October 2014. 

Oil reversed course.  It initially rose on press reports of the Saudi Arabia-Venezuela meeting yesterday.   We note that in the futures market, speculators have a record gross short light sweet crude position and the largest gross long position since last June.  The front-month Brent contract is making new three-day lows.  Support in the March light sweet crude contract may find support near $29.25. 

The US dollar itself is mostly softer.  Falling equities, which observers often mean by risk-off, is not weighing the dollar-bloc currencies, which often seems to be the case.  Sterling is a bit heavier.  After rising toward $1.4550 in late-Asia, sterling has shed three-quarters of a cent in the European morning to near the pre-weekend low.  A break of it (~$1.4450) could spur another 1% decline toward $1.44. 

The euro is trading within the pre-weekend range.  Buying interest seemed to peter out as the euro approached $1.1180, but a stronger cap its seen in the $1.1200-$1.1220 area.   Support is seen $1.1070-$1.1100.  The news stream is light. 

There were two reports of note from Japan.  First, was the December current account balance.  It was smaller than expected at JPY960.7 bln.  However, for 2015 as a whole the current account surplus was a JPY16.64 trillion, which is six-times larger than the 2014 surplus.   The trade balance, on a balance of payments accounting system, swung to a small surplus (JPY188.7 bln) from a small deficit (JPY271.5 bln), but two other things stand.  There has been record or near record tourism into Japan in 2015.  Also, the main driver of Japan's current account is the investment income (primary income) surplus.  It fell 5..1% on the year to JPY1.01 trillion in December.  It is the second largest for the month of December on record. 

The second report was labor cash earnings.  They were simply dreadful.  The Bloomberg consensus expected a 0.7% increase year-over-year.  Instead, they rose 0.1%.    In 2014,  cash wages rose 0.4%.  Total wages in Japan have not risen by more than 1% in any year since 1997.    When adjusted for inflation, wages in Japan have not risen since 2011.    It is difficult to envision how the BOJ will achieve its inflation target without stronger wage increases.  Indeed, it is possible that despite the QQE efforts, the BOJ does not meet its inflation target under Kuroda's watch. 

The week begins off slowly with US data.  The Fed's new labor market conditions index does not attract much attention.  Tomorrow's JOLTS report on job opening may draw more attention but is still not much of a market mover.  Yellen's congressional testimony and retail sales (at the end of the week) are the highlights.  

Today Canada reports building permits, which after a 19.6% collapse in November, are expected to rebound (~6.2%).  There may also be some interest in the central bank's Deputy Governor Lane's speech.  The combination of the 7% rise in the Canadian dollar (between January 20 and February 4) and the 20 bp increase in the implied yield of the March BA futures is ultimately not very helpful for the Canadian economy. 

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