Overview: Key developments today include the Hong
Kong court ordered liquidation of China's Evergrande and the reversal of oil
prices after a sharp rally initially in Asia after separate attack in the
Middle East that killed US troops in Jordan and struck a Russian oil tank in
the Red Sea. March WTI, which settled near $78 ahead of the weekend, its best
level since the end of last November, rallied to about $79.30 before returning
to almost $77.50 and is now a little above $78. China's CSI 300 rallied about
2% last week on the back of the cut in reserve requirements and other efforts
to support the equity market. It gave back nearly half of last week's gains
today, even though the other large regional markets rose. Europe's Stoxx 600 is
in a narrow range near the pre-weekend high, which was the best level since in
nearly two years. US equities indices are narrowly mixed. Separately, before
the weekend, the Biden administration announced a halt in new liquified natural
gas exports. It does not impact current flats but could delay or derail large
new projects. Post-Russia's invasion of Ukraine, the US provides about half of
Europe's LNG shipments. Europe's benchmark has fallen for the past three weeks
but is up 1% today.
Most European currencies are weaker, and
the euro made a marginal new low for the year. The dollar bloc and yen, and
Swiss franc trading with a firmer bias. Emerging market currencies are mostly
lower, though a handful of Asian currencies are posting minor gains. The
Hungarian forint is the weakest, losing almost 1%. The EU is threatening
retaliatory action if Prime Minister Orban continues to insist on blocking
large aid to Ukraine. At the same time, Hungary central bank meets tomorrow and
100 bp cut is possible. The government want to shift the target rate to bills,
which are lower than the deposit rate and the central bank is resisting. European
bonds are rallying, driving down yields by 5-7 bp today, while the 10-year US
Treasury yield is off four basis points to slip through 4.10%.
Asia Pacific
There seem to be two economic issues the
market is grappling with in the Asia Pacific's two largest economies. First, the market is convinced that the
BOJ jettison its negative policy rate in Q2. The issue is whether Japanese
investors repatriate funds invested offshore, with implications for interest
and exchange rates. Recall that in 2022, Japanese investors were net sellers of
international bonds at a weekly average rate of about JPY418 bln (~$3.2 bln).
Despite tweaks to the Yield-Curve Control policy, which, in two steps lifted
the upper end of the 10-year yield to 1.0%, Japanese investors returned to the
international bond markets, buying an average of JPY376 bln a week (~$2.7 bln).
As of November, the US Treasury estimates that Japanese hold $1.127 trillion in
US government bonds, up about $52 bln. In 2022, the dollar-value of Japanese
Treasury holdings fell by about $125.
The second economic issue being debated is
about trajectory of the Chinese economy. Long before the property bubble was
purposely pricked and well before Xi's abandonment of the previous path that
China was on, and the increased presence of his faction within the Chinese
Communist Party, well respected economists were claiming that the economy hit a
"Chinese
Wall." The Chinese economy has floundered since Covid, and
Beijing now appears to recognize new action is necessary to support the
economy. This week's release of January PMIs are unlikely to reflect the new
initiatives. The cut in required reserves announced last week are not effective
until next week. China's CSI 300 posted its first weekly gain of the year last
week. Yet, after seeing several false dawns (bottoms), many investors nursing
scar tissue, will likely look for more evidence that this time a low is in
place. Still, as of today, strategic investors will be barred from lending out
shares for short-sales during agreed lock-up periods on the major exchanges. At
beginning of Q4 23, limits were imposed on business executives lending out
shares received in strategic placements. Moreover, starting mid-March,
securities firms that borrow shares from institutional investors will have to
wait one day before providing them to brokers (to facilitate short sales.
The dollar settled last week near
JPY148.15, which was slightly above the week's average. Initially, follow-through buying lifted
the greenback to almost JPY148.35, stopping ahead of the JPY148.50 level where
there are $450 mln in options that expire today. Lower US yields may have
helped drag the dollar back to around JPY147.70. If that does not hold, the
next support is seen near JPY147.50. That said, the dollar has a four-week
rally in tow and the momentum indicators are stretched. In every
session last week, the Australian dollar rose above $0.6600 but was greeted
with sellers that drove it back down. The last time it managed to
settle above $0.6600 was January 15. Still, Aussie found support in the
$0.6550-65 area last week. The market has not given up and it is probing the
$0.6600 in the European morning. Still, the intraday momentum suggests the
pattern will hold and the Aussie will likely come off in the North American
session. Like the yen, the Australian dollar has fallen in each of the four
weeks to start the year. Plenty of data (retail sales, CPI, trade) ahead of the
central bank meeting on February 6. The dollar traded with a slightly
firmer bias against the Chinese yuan but was mostly confined to the pre-weekend
range (~CNY7.1715-CNY7.1820). Still, it is the third consecutive session
that greenback has firmed. The PBOC set the dollar's reference rate at
CNY7.1097 (CNY7.1074 on Friday. The average in the Bloomberg survey weas
CNY7.1802 (CNY7.1702 Friday).
Europe
This is a big week for Europe. Tomorrow is the first official estimate of
the eurozone's Q4 23 GDP. ECB President Lagarde warned of stagnation at last
week's press conference, but many economists see a 0.1% contraction. That may
meet a general definition of stagnation, but it would be the second consecutive
quarter of economic contraction, which is a popular definition of a recession.
On Thursday, the preliminary January CPI will be announced. The market expects
a slightly softer heading rate (2.8% vs. 2.9%) and a steady core rate 3.4%. The
Bank of England also meets on Thursday. It will not do anything but Governor
Bailey's forward guidance, besides being "data dependent" may help
shape expectations. Currently, the swaps market has about a 50% chance of a cut
in May and the first reduction is fully discounted in June. We look for a sharp
drop in UK CPI in the Feb-May period that could boost the chances of May cut.
The euro slipped to a new low for the year
(~$1.0815) ahead of the weekend before recovering and settling higher on the
day. In fact,
despite the repeated penetration of the 200-day moving average on an intraday
basis last week, it failed to close below it (now ~$1.0845) even once. It is
trading with a heavier bias today and returned to the pre-weekend low, but the
intraday momentum indicators are stretched, suggesting follow-through selling
may be limited in North America today. The euro settled last year near $1.1040.
It was sold in the first half of January and spent little time below $1.09.
Here in the second half of January, the euro has spent little time above $1.09
and not closed above it since January 15. Sterling is hugging the middle of
the $1.26-$1.28 range that it has been in since mid-December. The
five- and 20-day moving averages have converged slightly above $1.2700. Last
week, sterling mostly held above $1.2650 and peaked near $1.2775. Sterling has
been confined to a narrow range around $1.27 so far today.
America
This is an important week for the US;
however, the first part of the week will be quiet. The JOLTS report, the ADP private sector
employment estimate, and the Employment Cost Index will all be reported on
Wednesday, and the Treasury's quarterly refunding announcement (more supply) a
few hours before the FOMC meeting concludes. The Fed will not do anything,
leaving a statement that is unlikely to change much. Many expect some
discussion of the unwinding of the balance sheet and the timing of tapering. We
had previously thought it would happen around mid-year, but now there is more
speculation about a May announcement. US January auto sales will be
reported on Thursday followed by the national jobs report on Friday. Our
concern is that poor weather may have depressed activity and employment. Canada
reports November GDP figures on January 31. The monthly GDP print has been flat
for the previous three months and has not grown since May. Judging from last
week's central bank comments, officials are more focused on the stickiness
(persistence) of core inflation.
The same day that the Fed meets, three
Latam central banks are expected to cut rates. Colombia's central bank will
announce its decision before the Fed, Brazil, and Chile afterwards. Colombia
began its easing cycle at the end of last year with a 25 bp cut to 13.00%. The
market seems split between another 25 bp cut and a 50 bp move. Brazil's
central bank will likely announce it is continuing the easing cycle that began
last year with a 50 bp cut in the Selic rate to 11.25%. The swaps market
anticipates about 125 bp of cuts here in H1 24. Chile is expected to deliver a
100 bp cut to 7.25%. It began the easing cycle last July from 11.25%. Mexico
report Q4 23 GDP. It is expected to have slowed from about 1.1% in Q3 23 to
around 0.4% quarter-over-quarter, which would be slowest since the contraction
in Q3 21.
The Canadian dollar has fallen in
each of the four weeks to start the year. Its roughly 1.50% decline makes it the
second-best G10 performer after sterling (~-0.25%). The greenback has carved a
range in the last two weeks between about CAD1.3415 and around CAD1.3540. It is
trading quietly today (~CAD1.3430-CAD1.3465). The momentum indicators look to
be rolling over. A break of CAD1.3400 could see CAD1.3360 but we are wary of
anticipating a breakout ahead this week's big events that could encourage some
risk-off to which the Canadian dollar seems particularly sensitive. The
US dollar has risen against the Mexican peso for the past two weeks after
falling for the previous five. Ahead of the weekend, the dollar posted
its lowest settlement of the week (~MXN17.1615). Still, the greenback looks to
be consolidating mostly within a MXN17.14-MXN17.25 range.
Reviewed by Marc Chandler
on
January 29, 2024
Rating:
