Bonds and Stocks Rally, Greenback Meanders

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  • The US dollar entered a consolidative phase yesterday and this carried into today’s activity
  • Many investors anticipate a deal among oil producers, and have rallied oil prices to three-week highs; base metal prices are also higher
  • The US reports existing home sales and the Richmond Fed manufacturing survey; Canada report October retail sales
  • Brazil reports October current account and FDI; Hungary’s central bank is expected to keep rates steady at 0.9%

The dollar is mixed against the majors. The Aussie and the Norwegian krone are outperforming, while sterling and the Swiss franc are underperforming. EM currencies are mostly firmer. ZAR, KRW, and MXN are outperforming, while IDR, INR, and PHP are underperforming. MSCI Asia Pacific was up 0.9%, with the Nikkei rising 0.3%. MSCI EM is up 1.1%, with Chinese markets rising 0.8%. Euro Stoxx 600 is up 0.5% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is down 2 bp at 2.29%. Commodity prices are mostly higher, with Brent oil up nearly 2%, copper up nearly 1.5%, and gold up 0.2%.

The US dollar entered a consolidative phase yesterday and this carried into today’s activity. While the foreign exchange market is sidelined as the two week trend slows, stocks and bonds are posting strong gains today. Equities are being led by energy and materials, as oil and industrial metals continue to advance. Bonds are recovering from their recent slide.

The MSCI-Asia Pacific Index rose 0.9% in its second days of gains. Led by telecom, energy and materials, Japan’s Topix rose 0.3% to extend its winning streak into the ninth consecutive session. The Dow Jones Stoxx 600 is up 0.5%, with the common theme being energy and materials. The reprieve from the bond market sell-off has seen utilities recover.

Yesterday was the first session since the US election that the euro rose above the previous day’s highs. It is doing so again today, but the new highs are fought hard. Initial resistance is seen in the $1.0660 area and then $1.0720. The euro’s downtrend does not appear over. One of the key drivers pushing the euro lower is the widening interest rate differentials in the dollar’s favor.

The 2-year premium the US charges is still rising. Today it stands at a new high of 180 bp. It is up 7 bp on the week, though the euro is up a little more than half a cent. The premium widened by 22 bp last week and 9 bp the week prior. The 10-year premium is hovering around 3.0%. Through various business cycles, the US premium rarely has been greater going back to the last 1990s.

The dollar has pulled back against the yen after approaching JPY111.40. It is finding support in the JPY110.30-JPY110.50 band. The US 2-year premium is at new highs today near 125 bp. It is up a couple of basis points this week after rising 8 bp last week and 11 bp the week before.   The 10-year premium rose to 230 bp last week, its highest in five years and is consolidating a little below there now.

Similarly, the US 2-year premium over the UK is at 93 bp. It is has not been larger since at least 1992, when the Bloomberg data starts. The premium has risen 7 bp so far this week and 19 bp the week before. The prior week the premium rose 5 bp. Sterling could not maintain yesterday’s upside momentum that faltered just above $1.25 in Asia. Resistance was pegged near $1.2530. Support is seen ahead of $1.24 as the focus shifts to Hammond’s Autumn Statement that is expected to feature some new infrastructure spending.

Many investors anticipate a deal among oil producers, and have rallied oil prices to three-week highs. Our concern is that the most vocal comments suggesting a deal is likely is coming from OPEC countries like Iran and Iraq that seek an exemption from cuts or freezes. Similarly, Russia has expanded its output to post-Soviet Union highs, seemingly anticipating the possibility of a freeze.

Moreover, the change ushered in by the US election could, through deregulation and a stronger driver to make the US even less dependent on foreign energy, could see America’s output increase more than previously projected. The January light sweet oil contract appears to have traced out a bottoming pattern that projects another run toward $54, which has stemmed rallies twice earlier this year.

Base metal prices are also higher. Copper is at its highest level in over a year. Zinc and lead are also benefiting from the anticipation of stronger growth and infrastructure spending. More broadly, we note that the CRB Index gapped higher yesterday (and gap take on added significance as it appears on the weekly bar charts as well). This follows a gap higher opening last Tuesday, 15 November.   The bullish price action suggests scope for a couple more percentage points of gains near-term.

The US reports existing home sales and the Richmond Fed manufacturing survey.   Neither are typically market movers. Strong housing starts reported last week do not necessarily translate into existing home sales. They are expected to be little changed, but slightly softer, near the best levels since the crisis.

The US auctions $28 bln of five-year notes today. Given that policy expectations are in flux, today’s auction may not go much better than yesterday’s that saw primary dealers stuck with over 50%. Tomorrow the FOMC minutes from the meeting earlier this month will be released. Regardless of the election outcome, the minutes will likely reveal that the Fed was poised to hike rates, with “most participants” seeing a move shortly.

Canada report October retail sales. If there is a risk, it may lay on the upside of the median 0.6% forecast after a stronger than expected US report. The Canadian dollar is up about 0.8% this week, as are the other dollar-bloc currencies (and Swedish krona and sterling). The oil story appears to be trumping the rate differential story for the Canadian dollar. The US 2-year premium over Canada is widening a couple more basis points today to 42 bp, which is the most since January. However, the CAD1.3380 offers support for the US dollar. Resistance is seen near CAD1.3450.

Brazil reports October current account and FDI. Bloomberg consensus stands at -$3.1 bln and $6.5 bln, respectively. If so, the 12-month current account deficit would shrink to -$22 bln while the 12-month FDI would be steady at $73 bln. FDI is now more than three times greater than the current account gap, which is positive for BRL. Yet the improvement in the external accounts is coming mostly from collapsing imports. While the economic recovery remains elusive, the deep recession has lowered Brazil’s external vulnerability.

Hungary’s central bank is expected to keep rates steady at 0.9%. The bank has signaled steady rates for now, but has suggested that further unconventional measures may be used if needed. Measures already taken have pushed yields to record lows (0.47% for 12-month T-bills auctioned last week).