Overview: The reversal in US equities yesterday set
the tone for today. Among the large bourses, only Hong Kong escaped the
pain today. It was the sixth session of the past seven that the MSCI Asia
Pacific Index fell. Today's 1.3% retreat in the Stoxx 600 brings it lower
for the week, and third consecutive weekly loss. US indices closed on
their lows yesterday so the lower opening that the futures point to would at
least initially leave gaps on the charts. Falling equities are helping
push yields lower. The US 10-year, which tested 1.90% two days ago, is near 1.79%. European yields are 2-3 bp lower. Australia and
New Zealand benchmarks played catch-up and were off 6-7 bp today. The US
is broadly mixed. The dollar-bloc currencies and sterling (after a dismal
retail sales report) are weaker, while the Swedish krona, Swiss franc, euro,
and yen, are firmer. Near midday in Europe, the Dollar Index (~95.60) is
up about 0.5% on the week. Emerging market currencies are holding their
own as a group. The JP Morgan Emerging Market Currency Index is rising
for the third consecutive session and the third consecutive week, which matches
the longest streak since November-December 2020. Gold stalled near $1848
yesterday and is heavier a little above $1834. March WTI peaked slightly
above $87 yesterday and tested a four-day low today below $83 before resurfacing above $84. US
natural gas is almost 3% higher after falling more than 11% over the past two
sessions. Europe's benchmark has been alternating between gaining and
losing sessions since the middle of last week. Its 1.4% decline today follows
a nearly 7.2% advance yesterday. It is off around 7% this week.
Iron ore is up more than 2%. It is the fourth consecutive session
of such gains. Copper is paring yesterday's 2.5%
gain.
Asia Pacific
For the first time since
2014, the BOJ did not say that inflation risks were skewed to the
downside. Instead,
it said the risks were generally balanced at the conclusion of its policy
meeting earlier this week. However, today's December CPI reading was
disappointing. The headline rate edged up to 0.8% from 0.6%. The
median in the Bloomberg survey looked for a 0.9% increase. The core rate,
which excludes fresh food, was unchanged at 0.5%, defying expectations for a
small rise. Most disheartening was the measure that excludes energy as
well as fresh food. It deteriorated to -0.7% from -0.6%, matching the
worst since last June. Ironically, as the US, Europe, and many
emerging market countries wrestle with price pressures, if it weren't for
energy and fresh food prices, Japan would be experiencing
deflation.
Chinese policymakers are
concerned about the influence of its large tech companies. It sees the problem of
corruption. It is not just in the private sector, but recognizes it among
state-owned enterprises, including the financial sector. In the US, the
Senate Judiciary Committee approved anti-trust legislation that prohibits
companies providing a platform from giving an advantage to their goods and
services. A similar bill passed a House committee last year but has yet
made it to a floor vote. There are reportedly dozens of amendments
pending.
Intra-market correlations
with the dollar-yen exchange rate have broken down. The greenback is falling for the
fourth consecutive session against the Japanese yen and the 11th session in the
past 13. It has held slightly above last week's low near JPY113.50, where
a $730 mln option is set to expire today. A $655 mln option at JPY113.85
also expires today. A close above JPY114.20, last week's settlement may
help stabilize the tone. The Australian dollar recorded the
week's high yesterday slightly above $0.7275. It is approaching the
week's low set on Tuesday near $0.7170. There are A$1.1 bln options
struck around $0.7195 that expire today, which the Aussie is hovering around as
this is written. Meanwhile, the Aussie has broken higher against the New
Zealand dollar after several weeks of consolidation. Today's high, above
NZD1.07 is the highest since last July. Despite the lower rates in
China, the yuan has ground higher. It set a nearly four-year
high earlier this week and tested it today (for the dollar, that is below
CNY6.34). The PBOC set the dollar's reference rate at CNY6.3492, slightly
above the market's projection (Bloomberg survey) of CNY6.3490.
Europe
The UK reported dismal
retail sales. Yes,
the virus took a toll, but not unexpectedly. The median forecast in
Bloomberg's survey was for a 0.6% decline. Instead, the most
comprehensive measure fell by 3.7%. And adding insult to injury, the
November series was revised to show a 1.0% gain not 1.4%. Last month's
decline was the worst since last January's 8.3% plunge. Although sterling
is trading off, the swaps market is undeterred and still has an almost 90% chance
of a BOE rate hike at the February 3 meeting. It has about 107 bp of
tightening priced in for this year.
Baltic countries were
granted permission from Washington to send American weapons to Ukraine. The UK indicated earlier in the
week that it too was sending defensive weapons to Ukraine. Macron's
speech to the EU Parliament about the EU reaching its own "security and
stability pact" with Russia was quickly rebuffed by the Russians who prefer
dealing with the US. But Macron's speech no doubt did not sit well with
US officials either. There does seem to be a fissure in the alliance that
could be exploited by Russia for what has been dubbed a hybrid or asymmetrical
warfare, like the recent cyber-attack on Ukraine. Europe itself is
divided too between the eastern and central part that knows what living under
the Soviet boot was like, and more pacifist leanings in the west.
Meanwhile, it is thought that as long as talks continue, Russia will stay its
hand.
The euro posted an outside
down day yesterday by trading on both sides of Wednesday's range and settling
below Wednesday's low.
Follow-through selling from this bearish one-day pattern was limited and the
single currency held $1.1300 after making a marginal new low for the
week. Still, this week's decline (after a key reversal last Friday) has
been enough for the five-day moving average to slip below the 20-day for the
first time this year. Initial resistance is seen around
$1.1350. Sterling is falling for the fifth session in the past
six. Today's loss has pushed cable through its 20-day moving
average (~$1.3570) for the first time since before Xmas. It is finding
support near $1.3560 and below there, support is seen near $1.3530. A
break could spur a move back toward $1.3460 early next week.
America
The light US economic
calendar (only December's Leading Economic Indicator) will keep the focus on
the equity market and next week's FOMC meeting. The Federal Reserve's preliminary report
on digital currencies suggests a long-drawn-out affair ahead of us. The
most important factor for this is the understandable desire to get a strong
backing from the White House and Congress. A consensus is difficult to
envision any time soon. The Federal Reserve provided some broad pro and
con points, and is open to public commentary (here).
Amid the debate over US
inflation, Treasury Secretary Yellen staked out the dovish view, suggesting
that as the virus comes under control, price pressures will ease. She reiterated that she expects
inflation to finish the year closer to 2%. President Biden's approval
rating has been hit by inflation concerns. He recently claimed this was
the Fed's responsibility. Yellen walked it back a bit and noted that it
was a shared responsibility between the administration and the central
bank.
Canada reports November
retail sales today and a robust increase is expected (~1.2% after 1.3% in
October). The
shockingly poor US and UK retail sales were for December. While next
week's FOMC meeting is expected to signal a March hike, the Bank of Canada
meeting is live. Around a 2-in-3 chance of a hike by the BOC is
discounted in the swaps market. Overall, six hikes are priced in for this
year. Mexico and Brazil have light calendars today. Note that this
week, the Mexican peso is off about 0.85%, making it one of the weakest in the
EM space, while the Brazilian real has rallied about 1.6% coming into today,
helped by Lula's overture toward Alckmin, a previous rival, which was
understood as a signal that that the former president and the most likely next
president moved toward a more moderate course.
The US dollar has chopped
mostly between CAD1.2450 and CAD1.2550 this week. In the past two sessions, the
greenback tested the lower end of the range but rejected it and closed firmly
near CAD1.2500. There is nearly $2 bln of options that expire today
struck between CAD1.2545 and CAD1.2555, which may serve to reinforce the upper
end of the range. It probably takes a move above CAD1.2570 to be significant. The
greenback's downside momentum against the Mexican peso dried up earlier this
week near the 200-day moving average (slightly below MXN20.28). The
settlements in the past three days were near session highs. The dollar
reached MXN20.5660 yesterday, the highest since January 6. Without
follow-through buying, the greenback has slipped back below MXN20.50.
Nearby support is seen around MXN20.45, which may be sufficient ahead of the weekend.
Disclaimer
Reviewed by Marc Chandler
on
January 21, 2022
Rating:
