Overview: The capital markets remain unsettled. The US CPI with a 6%-handle has lifted bond market volatility, disrupted rallies in stocks, and extended the dollar's rally. Small gains in the US S&P 500 and NASDAQ yesterday and a better news stream from China helped lift Asia Pacific equities today. Benchmarks in Japan, South Korea, and India rose more than 1%. Europe's Stoxx 600 is struggling as energy, health care, and utilities are mostly offsetting gains in consumer discretionary and communication, and real estate sectors. It has increased 19 of the past 24 sessions. US futures are posting slight gains. The bond market remains under pressure. The US 10-year yield is three basis points higher at 1.58%, which puts it up nine basis points this week. European benchmarks are firmer. Germany is a notable exception. It is virtually unchanged on the day, leaving the yield up a single basis point this week. This week, the peripheral yields, led by Greece and Italy's 10-15 bp jump, have risen more than the core. The dollar continues to trade firmly. After making a new low for the year (~$1.3355), sterling has stabilized. The euro was sold to fresh lows in the European morning (~$1.1435). On the week, the Swedish krona's 2% decline leads, but only the Japanese yen and British pound among the majors have fallen by less than 1% this week. A handful of emerging market currencies in Asia, including the Chinese yuan, are posting gains against the greenback. Still, most are lower, led by the Russian ruble, followed by the Mexican peso and Turkish lira. The JP Morgan Emerging Market Currency Index is off around 0.4% this week. It will likely be the eighth weekly decline in the past 10. Rising yields had seemed to sap gold's strength earlier, but it has a six-day advance in tow coming into today. It is struggling to sustain the momentum after nearing $1870 in the middle of the week. With about a 0.8% loss on the day (~$1849), it is up almost 1.7% on the week. December WTI is off 1.6% as it tests the $80 level. Today's loss is enough to offset the gains earlier in the week, and a close below the $81.25 area extends the weekly loss to three, the longest since last October.
Asia Pacific
Three developments in China helped lift sentiment. First, Single Day sales (11-11) surged to new records. Second, the US rejected a request to investigate Asian solar panel manufacturers. Third, an investigation into Evergande's relationship with Shengjing Bank appears to have been completed, and there is speculation that Beijing will begin easing up on the property developers. Separately, we note that several new virus cases in Beijing have led to orders to cancel conferences.
First thing Monday in Tokyo, Japan reports Q3 GDP. A small contraction is expected, but the more recent data gives reason to expect that the world's third-largest economy is recovering. Moreover, the government is expected to unveil a large supplemental budget in the coming weeks. Consumption and business spending is expected to have fallen in Q3. Trade and inventories may have been less of a drag than in Q2 when both shaved about 0.3 percentage points from growth. Perhaps the most disturbing element will be the deflator. It fell 0.2% in Q1 (year-over-year), the first decline in three years. It fell 1.1% in Q2 and is expected to have fallen 1.2% in Q3.
The jump in US yields lifted the greenback back below JPY112.80 in the middle of the week to JPY114.30 today. The upside momentum peaked in Asia, and the dollar is straddling the JPY114.00 area in late European morning turnover. There are a little more than $2.1 bln in expiring options struck between JPY113.90 and JPY114.00 today. The dollar is up around 0.5% this week, and it is the sixth weekly advance in the past eight weeks. The Australian dollar extended its losses to almost $0.7275, its lowest level since October 7. Here too, the momentum burnt itself out in Asia, and it has steadied around $0.7300 in Europe. Yesterday's disappointing jobs data was coupled with a strong inflation expectation reading (November 4.6% after October was revised from 3.6% to 4.6%). The swaps market has a 10 bp rate hike discounted in six months. Today was the seventh session that the Chinese yuan has alternated between gains and losses. Still, net-net, over the period, the dollar has fallen from CNY6.4066 to nearly CNY6.3800. The dollar is off about 0.25% against the yuan this week, the sixth weekly decline in the past seven. The PBOC set the dollar's reference rate at CNY6.4065, a smidgeon lower than the CNY6.4066 median forecast (Bloomberg survey).
Europe
The US is warning that Russia may be poised to invade Ukraine. Border fighting has escalated recently, and Russian troop and tank movements have been reported. US officials believe that Russia has orchestrated the migrant crisis between Belarus and the EU to destabilize the region. Belarus, in turn, is threatening to cut a key gas pipeline if Poland does not acquiesce. The EU, UK, and the US are planning for sanctions to further isolate Belarusian President Lukashenko. Russia, of course, denies any intention to invade Ukraine and suggests that such claims themselves are meant to exacerbate tensions.
COP-26 is ending, and this is seen as putting the UK-EU dispute over the Northern Ireland protocol back toward the top of the agenda. There has been speculation that after the climate summit was over, the UK would invoke Article 16 of the agreement that allows it to suspend parts of it. That is within the rules, provided the EU judges it is in good faith. The risk is that it is not and that the EU has threatened to overall trade relationship.
The euro spent last month in a $1.15-$1.17 range. It broke down after the US CPI on Wednesday and has not been able to resurface above $1.15 since support now becomes resistance. It reached almost $1.1435 today. While the $1.1400 area may offer psychological support, we see little on the charts until $1.1290-$1.1300. Resistance is now pegged in the $1.1460-$1.1480 area, and there are options for about 1.4 bln euros at $1.1460 the expire today. Sterling edged closer to $1.3350 for a new 2021 low before recovering to poke above $1.3400, where new sellers lurked. There is an option for almost GBP800 mln at $1.3320 that expires today, but it seems too far away to have much impact. A gain today would only be the third in the past two weeks.
America
The US economic diary features the JOLTS report, where job openings may have fallen from high levels for the second month in September. However, even if the median forecast (Bloomberg survey) is accurate, at 10.3 mln, it is still incredibly high, and it would be the fourth consecutive month above 10 mln. It finished last year near 6.75 mln. The University of Michigan's preliminary consumer confidence report is due as well. A small gain is expected, though the focus may be on the inflation measure after the elevated NY Fed survey and the high CPI reading. In October, the one-year inflation expectation was 4.8%, while the 5-10 year outlook was 2.9%. Separately, Covid cases are on the rise in the US nationally, led by an increase in more than 20 states.
The economic calendar of Canada, Mexico, and Brazil is light today. Note that Mexico's central bank delivered the widely expected 25 bp hike yesterday, lifting the overnight rate to 5.0%. Although the central bank raised this year's inflation projection to 6.8% from 6.2%, signaling the likelihood of another hike when it meets next (December 16), the market took it as a "dovish hike" and sold the peso. The dollar jumped from below MXN20.50 to almost MXN20.70 and extended the gains in early Europe. Initial support is seen around MXN20.62. Note that yesterday, Peru hiked by 50 bp to 2.0%. Uruguay also lifted its key rate 50 bp (to 5.25%).
The US dollar traded on both sides of Tuesday's range against the Canadian dollar on Wednesday, and the close above Tuesday's high was a bullish outside up day. Follow-through greenback buying yesterday, when both the US and Canada were on holiday, lifted it to almost CAD1.2600. It traded a little above CAD1.2600 today for the first time since October 6. This area corresponds to the (50%) retracement of the greenback's decline since the September FOMC meeting. The next retracement target (61.8%) is near CAD1.2665. The US dollar closed above the upper Bollinger Band (two standard deviations on top of the 20-day moving average) and remains above it today (~CAD1.2555).
Disclaimer
Reviewed by Marc Chandler
on
November 12, 2021
Rating:
