Dollar Mixed in Thinning Activity, Dow 20,000 Watch Continues

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  • The Riksbank extended its bond buying program through H1 17, but at a slower pace
  • The European Court of Justice ruled that Spanish banks that over charged for mortgages must offer compensation
  • There is another interesting decision expected shortly from the European Court of Justice, with implications for Brexit
  • Bank of Thailand kept rates steady at 1.5%, as expected; Brazil mid-December IPCA inflation rose 6.58% y/y vs. 6.69% expected

The dollar is mixed against the majors. The Scandies are outperforming, while sterling and the dollar bloc are underperforming. EM currencies are mostly firmer. RUB and TRY are outperforming, while IDR and MXN are underperforming. MSCI Asia Pacific was up 0.1%, even with the Nikkei falling 0.3%. MSCI EM is flat, even with Chinese markets rising 0.9%. Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is flat at 2.55%. Commodity prices are mostly higher, with oil up 0.4%, copper up 0.1%, and gold up 0.1%.

The US dollar is narrowly mixed as the holiday markets makes for light turnover. Global equity markets are not finding much encouragement from the new record highs set by the Dow Jones Industrials.

There have been a few developments to note. First, the Swedish krona is the strongest of the major currencies, rallying 0.7% against the dollar and reaching a two-month high against the euro following the Riksbank meeting. The central bank extended its bond buying program through H1 17, but at a slower pace.

It was a controversial decision and could be the last efforts. Two of the six member board wanted to stop the bond purchases now. One other was interested in extending the purchases, but at half the pace that was ultimately decided. Currently, the Riksbank is buying SEK45 bln of bonds (for H2 16). In the first half of next year, it will buy SEK15 bln of conventional bonds and SEK15 bln of inflation linked bonds. The Riksbank kept the deposit rate at minus 50 bp.

Second, the European Court of Justice ruled that Spanish banks that over charged for mortgages must offer compensation. This was a blow to Spanish banks, which fell in response to the final ruling. The preliminary ruling allowed a time-limit to claims for reimbursement, but the final court ruling disallowed the constraint. All Spanish banks are not equally affected and some banks have put aside some of funds. Still, financials is the worst performing sector in Spain today. They are off nearly 1.75% in late morning turnover, while the Spanish market as a whole is off about 0.75%.

Meanwhile, Italian banks are under modest pressure. The index of Italian banks is off 0.6% and is the sixth declining session of the past nine. After the cabinet approved increasing the country’s debt by 20 bln euro to help the banks, both chambers of parliament will vote on measures today. For reasons that seem to stem more from politics than economics, Italy has been slow to address its banking system woes, and when it does move, it tends to do too little. There is no shock and awe or even a pretense of getting ahead of the curve of expectations.

Japanese shares finished marginally lower. They have advanced for six consecutive weeks. The Nikkei is up fractionally this week. However, as it rallied, short interest has grown. As of last week, at the Tokyo and Nagoya markets, the short interest rose to JPY990 bln, a seven-year high.

There is another interesting decision expected shortly from the European Court of Justice, with implications for Brexit. The Court will decide if a decision on a free-trade agreement with Singapore requires individual country approval or if it is sufficient that the EU institutions approve. If individual country approval is needed, it would suggest that the UK will need to have all individual EU members to ratify a new trade deal with the UK. This could prove to be a laborious and time-consuming process.

During the North American session, the US reports weekly mortgage applications and November existing home sales. There are no Fed speakers today.

Bank of Thailand kept rates steady at 1.5%, as expected. It took a more dovish tone, noting that risks are tilted more to the downside now due to global developments. Inflation forecasts for this year and next were cut to 0.2% and 1.5%, respectively, and compares to the 1-4% target range. The bank also warned that the baht is likely to be more volatile next year. The BOT has been on hold since the last 25 bp cut back in April 2015. Another cut is possible next year if the economy slows further, but for now, the bank is taking a “wait and see” approach.

Brazil mid-December IPCA inflation rose 6.58% y/y vs. 6.69% expected. This was the lowest rate since mid-January 2015. COPOM highlighted the possibility of a faster easing cycle at its November meeting. Next COPOM meeting is January 11, and markets are currently pricing in a 50 bp cut to 13.75%. The central bank’s quarterly inflation report will be released Thursday. Elsewhere, Brazil’s congress approved a bill giving debt relief to the states. However, it removed the requirement that the states implement austerity measures in return for the relief.