Overview: Amid inflation fears and the decline in crypto prices, gold was resurrected, rallying the most in three months yesterday to its best level since November. It is consolidating those gains today, straddling the $1840 level. Equities are trying to stabilize. The MSCI Asia Pacific Index snapped a five-day slide with a 1% gain helped by a 3.4% rally in Hong Kong . The Hang Seng was lifted by the mainland's initiatives, which included a small reduction in the loan prime rate and promises of stepped-up support for the property sector. China's CSI 300 rose almost 1%, its third gain this week. A rebound in the tech sector also helped lift the Nikkei by 1.1%. European shares opened higher, but the lack of breadth saw the Stoxx 600 turn lower. Gains in utilities and communications are not to offset the losses elsewhere, led by energy and financials. US futures are firm after closing poorly yesterday. Benchmark 10-year yields are softer. The US 10-year is off three basis points to near 1.83%. European yields are 1-3 bp lower. The US dollar is trading off against most of the major currencies. The Norwegian krone, where the central bank stood pat, and the Swedish krona are laggards today. A strong employment report is helping lift the Australian dollar by around 0.4% to lead the pack. Emerging market currencies are mixed, with Russia, Hungary, and Turkey leading the decliners. The Thai baht and South African rand are the best performers, but the JP Morgan Emerging Market Currency Index is slightly weaker today after posting its best gain in a month yesterday (~0.75%). Industrial metals are firmer. Tin and nickel shortages are behind their surge, while iron ore prices are up 2%+ for the third consecutive session and at their best level since last August. Copper prices are extending yesterday's 2% rally. Crude is consolidating a three-day rally that lifted March WTI to almost $86.80. US natgas tumbled almost 5.9% yesterday and is straddling the $4 level today. The Dutch benchmark is paring initial follow-through after dropping 8.3% yesterday.
Asia Pacific
China's loan prime rate was
cut. The
one-year rate was cut by 5 bp in December and 10 bp earlier today to stand at
3.7%. The five-year loan prime rate was cut by only five basis points (to
4.6%). This was less than expected and is seen as a cautionary signal
about the property market. Still, policymakers are seen taking other
efforts to promote stronger growth more broadly. Further easing by the
PBOC is expected.
Japan reported a smaller
than expected December trade deficit. Exports did not pullback as much as expected.
After rising 20.5% year-over-year in November, they slowed to a 17.5% gain in
December. Imports slowed more than expected, to 41.1% from 43.8%.
This is broadly consistent with the seasonal pattern that December often sees
improvement from November. Last year, Japan reported an average monthly
trade deficit of JPY122.7 bln. In 2020, the average monthly trade surplus
was JPY32 bln. An average trade shortfall of almost JPY140 bln was recorded in
2019. Yet, through this period, Japan continued to experience a current
account surplus, driven not by trade in goods and services, but by the return
on foreign investment.
Despite new social restrictions,
Australia's December jobs data was better than expected. Overall job growth was near 65k
(Bloomberg median was for an increase of 60k), and the unemployment rate
tumbled to 4.2% from 4.6% (4.5% anticipated). Three-quarters of the jobs
were full-time positions, and the participation rate was steady at 66.1%. The swaps market has about 40 bp of tightening priced in over the next
six months. The central bank has pushed against such expectations.
It meets again on January 31.
The US dollar recorded a new
low for the week near JPY114.00, where a $520 mln option expires today. It has not been able to rise much
about JPY114.50. We suspect the North American market can probe
the upside. A close above JPY114.60 would help stabilize the
tone. The Australian dollar is firm after the employment data
pushed it to new highs for the week just shy of $0.7260. The market
does not seem to have the energy to test the $0.7290-$0.7300 area, where
options for around A$660 mln lay. The dollar spent the
entire mainland session below CNY6.35. The PBOC set the
dollar's reference rate at CNY6.3485, the strongest in three years, and
stronger than the Bloomberg survey projected (~CNY6.3478). Still,
state-owned banks (aren't they all?) were seen on the dollar's bid when it
approached CNY6.3400.
Europe
The economic news stream is
light. The
ECB's record of last month's meeting will be published shortly, but it tends
not to be a market mover. The December CPI was revised to show a
5.0% year-over-year increase rather than 4.9%, while the monthly increase
remained at 0.4% and the core rate was steady at 2.6%.
The US and Europe agree that
a Russian invasion of Ukraine needs to be resisted, but there is still differences
on the response. Biden
raised the prospect yesterday of something short of a full invasion, which he
acknowledged would complicate the response. Russia has continued to
reinforce its troops and artillery. US Secretary of State Blinken and
Russia's Foreign Minister Lavrov are to talk tomorrow. Russia continues to
deny plans to invade but demands concessions from NATO that will not be
forthcoming. This hangs over the markets like the sword of
Damocles.
Norway's Norges Bank kept
rates on hold today, but reaffirmed a hike in March, which would be the first
meeting with a new governor, who has yet to be named. The swaps market sees 85 bp of
tightening this year. Last year, it hiked rates in September and
December. Elsewhere, we note that as widely expected Turkey's central bank left the one-week repo rate unchanged at 14.00%, lending credence to ideas that the easing operations are complete after 500 bp in cuts were delivered in the last four months of 2021.
The euro is trading quietly
in less than a 30-pip range below $1.1370. The $1.1380 area is the (38.2%) retracement objective
of the decline from last Friday's high near $1.1485. A break of $1.1340
could see $1.1320 but a close below $1.1300 is needed to lend credence to ideas
that a high is in place. There is a large option (nearly 1.1 bln euros)
at $1.1350 that expires today. Sterling is coiling. It
is inside yesterday's range, which was inside Tuesday's range
(~$1.3575-$1.3660). The consolidative tone may persist today ahead of
tomorrow's retail sales, where there could be room for disappointment after a
1.4% gain in November.
America
The US reports weekly
initial jobless claims, the Philadelphia Fed survey, and existing home
sales. The
high frequency data points may pose some headline risk, but the market is
focused on policy ahead of next week's FOMC meeting. That said, the
Empire State manufacturing survey, reported earlier this week, was a
disappointment, while yesterday's housing starts, and permits were stronger
than anticipated.
Canada's December headline
CPI yesterday was in line with expectations (4.8% vs. 4.7% in November), but
the underlying core measures were firmer. The Bank of Canada meets next week, and
the swaps market has a little more than a 2/3 chance of a hike. Tomorrow,
Canada reports November retail sales, which are expected to be robust
(1%+). Mexico reports its December unemployment, which is expected
to have drifted lower.
The greenback is chopping roughly between CAD1.2450 and CAD1.2550 for the sixth session. This consolidation phase follows the US dollar's decline from last year's high on December 20 near CAD1.2965. Without re-kindling the downside momentum, the greenback may be set up for a bounce. The Slow Stochastic is turning up. The CAD1.26 area is technically important. It is the neckline of a head and shoulders pattern. The dollar's downside momentum faded against the Mexican peso. Despite repeated attempts, it could not punch below the 200-day moving average (~MXN20.2850) and bounced yesterday to close above MXN20.50 for the first time since January 5. It is in a narrow range straddling MXN20.50 today. The intraday technicals caution against chasing the dollar higher. A pullback toward MXN20.40-MXN20.45 looks reasonable.
Disclaimer
Reviewed by Marc Chandler
on
January 20, 2022
Rating:
