Overview: The recovery of the NASDAQ yesterday
and the slight easing of the US 10-year Treasury yield is setting the stage for
today's market moves. That said, Japan's equities had to play catch-up
after being on holiday yesterday and the yen's strength took a toll. Among the
large Asia Pacific bourses, only Taiwan, South Korea, and Australia rose.
It is difficult to detect the impact of what appears to be the second test of
North Korea's hypersonic missile in about a week. Europe's Stoxx 600 is
snapping a three-day decline with broad gains led by information technology and
consumer discretionary sectors. US futures are also trading modestly
higher. After probing 1.8% yesterday, the US 10-year yield is flat near 1.76%.
European yields are narrowly mixed. The dollar is trading heavier
against all the majors but the yen and most emerging market currencies, except
the Taiwanese dollar and Turkish lira. The JP Morgan Emerging Market
Currency Index is up small, which if sustained would be the third rise in four
sessions. Gold is higher for the third session and is back above the
200-day moving average (~$1801). Last week's high was a little above $1830.
Oil is recovering from yesterday's setback and February WTI is again poised to
challenge the $80-a-barrel level. Natgas prices in the US and Europe are
off more than 1%. Iron ore jumped nearly 3% to recoup its past two
sessions of losses plus some. Copper is firmer to recover a little more
than half of yesterday's 1.3% decline.
Asia Pacific
Japan continues to struggle
against deflationary impulses seen clearly in the GDP deflator (-1.2% in Q3)
and measures of CPI excluding fresh food and energy (-0.6% in
November). Wages
have been flat for nearly 20 years. However, a BOJ survey released earlier
today showed that inflation expectations rose to their highest level in
13-years. They see 5% inflation next year, according to the quarterly
survey, and 3% a year on average over the next five years. There is some
speculation that the BOJ will drop its characterization of downside risks for
inflation at next week's policy meeting.
Australia reported November
trade figures and retail sales. The former disappointed while the later was twice as strong
as expected. Australia's trade surplus fell for the fourth consecutive
month, and it may suggest that the positive terms of trade shock is
easing. The average monthly surplus through November last year was
A$10.44 bln. November's surplus was A$9.4 bln. In the first 11
months last year, the average trade surplus was A$5.93 bln and in 2019 it was
almost A$5.7 bln. Separately, the retail sales soared by 7.3%
month-over-month. It followed a 4.9% rise in October and 1.3% in
September. That provides an average in the past three months of 4.5%. In
the three months through August, Australian retail sales fell by an average of
2.1%, as the social restrictions and lockdowns pinched.
The dollar held JPY115.00
yesterday and so far, the recovery has been limited to slightly more than
JPY115.40. An
option for around $440 mln at JPY115.50 expires today. It appears that
the dramatic slide in stocks overwhelms the impact of higher rates.
Consider that the 30-day correlation between the change in the exchange rate
and change in the S&P 500 is near 0.6%, while the 100-day correlation is
half as much. The correlation of the change in the exchange rate and the
change in the US 10-year yield has slipped to about 0.55% over the past 30
days. The 100-day correlation was around 0.65% before Xmas. The
Australian dollar is firm within yesterday's range. It is holding
below $0.7200. A move above there may encounter resistance near $0.7220.
It appears to be a consolidative session. The Chinese yuan edged
a little higher, but it remains in last Thursday's range (~CNY6.3675-CNY6.3850).
The reference rate was set for the dollar a little softer than expected at
CNY6.3684 (compared with the median projection in the Bloomberg survey for
CNY6.3695).
Europe
US-Russian talks did not
lead to a narrowing of the differences. It seems clear that the key Russian demand is to be giving iron clad assurances that Ukraine (and Georgia) will never be
allowed to join NATO. So even if the other demands were met, without this
one, Russia cannot be secure. Talks continue today with NATO.
The eurozone aggregate
November industrial production figures will be reported tomorrow. Recall that last week, Germany and
France disappointed. German industrial output was expected to rise by
1%. Instead, it fell by 0.2%. French industrial production was
expected to rise by 0.5% but fell by 0.4%. Spain offered a big upside
surprise today. Its industrial output jumped 4.5% in the month, more than
10x what economists projected.
In a little less than two
weeks, Italy's presidential selection process gets underway. Italian politics is slowly making
its way back into the market's field of vision. The problem is that if
Draghi becomes president, it leaves the premier role open. Polls show the
right League and Brothers of Italy could possibly secure it over the
center-left PD. The parties on the right tend to be more hostile to the
EU. If Draghi does not become president, the right may secure it for
Berlusconi. Draghi, who is not leading a political party, would likely be out
in next year's election.
Revelations about a party in
10 Downing Street May 2020 encouraged by PM Johnson hours after a social
gathering were banned is the latest blow against the government. The cavalier attitude and
hypocrisy are undermining support for Johnson. It is emboldening Labour,
which is running ahead in some polls. Labour is taking the initiative and
is forcing a parliament debate on dropping the sales tax on energy
bills.
The euro has been confirmed
to about a third of a cent in the upper half of yesterday's range. The North American market took the
euro toward the lower end of its recent range (~$1.1270). The market
seemed to have plenty of reasons to unwind the post-US jobs data gains, but it snapped back and settled above $1.13. Today's high is slightly above $1.1350.
It pulled back in early European turnover but looks poised to test the highs
again. Still, given the more aggressive Fed posture being discounted, the
political backdrop with Russia and Italy, we continue to think the euro is
vulnerable. Sterling is trying to establish a foothold above
$1.36. It reached $1.3620 in late Asia, its best level since November
4 before the BOE's disappointment (stood pat). There has been no
follow-through buying in the European morning. Initial support is seen
near $1.3580. Sterling's outperformance has seen the euro slip to new lows
since February 2020.
America
The Fed's Vice Chairman
Clarida is stepping down at the end of this week, a couple weeks before his
term ends. He
already has a teaching gig lined up. Although no official reason was
given for the early departure, many are linking it to new disclosures that he
first sold $1-$5 mln of an equity fund and then bought it back a couple days
later, just before the Fed announced emergency measures to combat the disruption
trigged by the pandemic. At first the Fed had said it was a pre-scheduled
rebalancing, but it appears to be more than that now. He is the third Fed
official to resign under such a cloud. No doubt the issue will be raised
in Powell's confirmation hearings today. While the focus is on Fed
officials, note that members of the House of Representatives, Senators, and
judges (and their immediate families) are not held as high a standard as Fed
officials. Meanwhile, President Biden is expected to announce additional
nominations to the Federal Reserve board shortly. FOMC voting members and perceived
hawks Mester and George also speak today, before Powell's
testimony.
The US and Canada have light
data calendars today, while Mexico reports November industrial output (0.6%
expected the same as October) and Brazil reports IPCA inflation (which is
expected to have eased for the second consecutive month). The market has almost 300 bp of
tightening by Brazil discounted over the next three months. This seems to
imply two more 150 bp hikes. While the first, on February 2 has been pre-committed,
the second one seems somewhat less likely. Note that the swaps curve is
pricing in a cut in the second half of the year.
The US dollar bounced from CAD1.26 yesterday, which we suggest is the potential neckline of a head and shoulders topping pattern that would project toward CAD1.2250. The bounce carried the greenback to almost CAD1.27, but its now back to around CAD1.2640. The intraday momentum indicators suggest CAD1.26 is safe for another day. The greenback is pinned near its recent trough against the Mexican peso. The low on New Year’s Eve was about MXN20.3270. Today's low is slightly below MXN20.36. Dollar bounces toward MXN20.50 last Friday and yesterday were sold. The 200-day moving average may be the next downside target. It is near MXN20.2750.
Disclaimer
Reviewed by Marc Chandler
on
January 11, 2022
Rating:
