Consolidation in Capital Markets

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  • After some dramatic moves yesterday, a consolidative tone is emerging today, despite the slate of economic data
  • Japan reported the strongest manufacturing PMI in a year and the eurozone composite PMI reading of 54.4 in December is the best in more than five years.
  • In addition to the oil and product inventory estimate from API late in the session, the US sees December auto sales and the minutes from the FOMC meeting
  • Thailand December CPI rose 1.13% y/y vs. 0.96% expected
  • The Mexican peso remains under pressure and is on track to test the all-time low near 21.60 soon

The dollar is broadly weaker against the majors. The dollar bloc is outperforming, while the Swiss franc and sterling are underperforming. EM currencies are mostly firmer. ZAR and BRL are outperforming, while RUB and KRW are underperforming. MSCI Asia Pacific was up 1.4%, as Japan markets rose 2.5% after returning from holiday. MSCI EM is up 0.1%, with Chinese markets rising 0.8%. 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 2.44%. Commodity prices are mostly higher, with oil up 0.1%, copper up 0.9%, and gold up 0.7%.

Full liquidity has yet to return from holidays. After some dramatic moves yesterday, a consolidative tone is emerging today, despite the slate of economic data. The corrective pressures on the dollar we had been looking for is most evident against the Australian and Canadian dollars, while the greenback is softer within yesterday’s ranges against the euro, yen, and sterling.

The euro needs to resurface above $1.0450 to be notable. Otherwise, it is in a flat consolidation after falling to new multiyear lows yesterday. The low from Asia was $1.0390.   The dollar is likely to find support against the yen above yesterday’s low near JPY117.20. Initial resistance is now seen near JPY118.00. Sterling appears capped below $1.23. Support is seen near $1.2220.

The Aussie and Canadian dollar are up a little more than 0.5%. The former is approaching its 20-day moving average near $0.7285. It has not closed above that average since December 14. The $0.7300 corresponds to a retracement objective of the decline since then. For its part, the Canadian dollar is through its 20-day moving average (~CAD1.3380) for the first time since December 15.   At CAD1.3340 the greenback has retraced 50% of the gains since December 14 FOMC rate decision day. The 61.8% retracement is near CAD1.3280.

Asian equities followed the US lead, where the S&P 500 gains (~0.85%), was the best in almost a month. The MSCI Asia Pacific Index rose 1.3%, its biggest rise since November 10. Foreign buying has been noted in South Korea and Thailand. The Nikkei advanced 2.5%, perhaps playing a little catch-up after yesterday’s holiday. Chinese shares also rose with the Shanghai Composite reaching three-week highs.

European equities are little changed, with the Dow Jones Stoxx 600 straddling yesterday’s close. Telecoms and financials are leading the gainers, while consumer-discretionary and utility sector pace the losers. Of note, Italian banks shares are extending their rally into a fourth consecutive session. Recall that last week; the FTSE-Italia All-Share Banks Index fell to snap a four-week 25%+ rally. It lost 2.8% last week and is up 5.7% this week.

Bond markets are mixed. Core yields are mostly a little firmer, while peripheral yields are a little softer, with Greek bonds extending the strong rally. As tensions between the EU and Greece flared up, the 10-year yield rose to 7.5% in mid-December. It finished last year near 7.11% and is now near 6.73%. Separately, the US 2-year yield premium over Germany peaked last week near 2.06% and spent the last four sessions below 2.0%. It is now poking back above there.

The economic data has generally been positive, suggesting that the high income economies finished last year with some momentum that may carry over into the New Year. Yesterday’s US manufacturing ISM showed a strong rise in new orders and export orders (despite the sharp rise in the dollar in Q4).

Today Japan reported the strongest manufacturing PMI in a year and the eurozone composite PMI reading of 54.4 in December is the best in more than five years. Manufacturing, as we saw yesterday, was stronger than the flash estimate, while the slippage in services was less than estimated. Also, following on the heels of yesterday’s robust German and French inflation reports, the eurozone aggregate measure saw headline CPI rise to 1.1% from 0.6% in November, while the core rate ticked up to 0.9% from 0.8% (it bottomed near at 0.6%).

Yesterday’s UK manufacturing PMI was stronger than expected. It has been followed by a stronger construction PMI (54.2 from 52.8). Separately, the UK reported that mortgage approvals reached an eight-month high in November. News that the UK’s envoy to the EU (Ivan Rogers) resigned (term ends in October) is seen as a loss of a voice of moderation. He has been critical of the government’s preparations for Brexit negotiations. In our read, developments that favor what has been dubbed a hard Brexit are likely negative for sterling. However, the consolidative tone today is prevailing. Sterling is practically unchanged against the euro. The cross appears stuck in a GBP0.8460-GBP0.8540 range.

Oil prices staged a sharp reversal yesterday. March Brent made new highs above $56 a barrel before turning lower, falling to almost $53. The February WTI contract reached almost $55.25 before changing directions and dropping to almost $52 a barrel. There did not seem to be much new behind the move. The fact that some OPEC members were cutting output favored prices initially. Reports today suggest that Russia may wait to see OPEC’s implementation before beginning its own cuts. Prices are stabilizing today, awaiting US inventory news.

In addition to the oil and product inventory estimate from API late in the session, the US sees December auto sales and the minutes from the FOMC meeting. Auto sales are firm, about the 17.8 mln annual unit pace, but there is little momentum of which to speak. We suspect the FOMC minutes may be less hawkish that the rate hike and dot plot would imply. As we have noted, the average estimate for Fed funds among the participants did not change as much as the median. Also, we are reminded that Yellen acknowledged in her press conference that some but not all officials adjusted their forecasts for potential changes in fiscal policy.

Thailand December CPI rose 1.13% y/y vs. 0.96% expected and 0.60% in November. This is the highest rate since November 2014 and back within the target range of 1-4%. Rising price pressures should keep the Bank of Thailand in cautious mode, though no tightening is seen near-term. Indeed, the minutes from its last meeting suggested a fairly dovish outlook remains in place. Next policy meeting is February 8 and no change in rates is expected then.

The Mexican peso remains under pressure and is on track to test the all-time low near 21.60 soon. While we had counseled taking a “wait and see” approach regarding US-Mexico relations under the incoming administration, it is clear that we are already seeing a negative impact on Mexico. Ford said yesterday that it scrapped plans to build a $1.6 bln plant in Mexico after coming under criticism from President-elect Trump. Instead, the company will invest $700 mln to expand an existing plant in Flat Rock, Michigan, which Ford CEO Fields said would create 700 jobs. With President-elect Trump yet to take office, it is surprising to see corporate decisions being influenced by his comments.