Tuesday’s Two Developments

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  • The recovery in the global equity markets is being challenged
  • The yen has strengthened across the board
  • The main economic news today is limited to the UK inflation readings
  • The South African political drama continues; Hungary January CPI was steady at 2.1% y/y

The dollar is broadly weaker against the majors.  Yen and Swissie are outperforming, while Aussie and Loonie are underperforming.  EM currencies are mostly firmer.  THB and ZAR are outperforming, while PHP and CNY are underperforming.  MSCI Asia Pacific was up 0.6%, with the Nikkei falling 0.7% after returning from holiday.  MSCI EM is up 1% on the day, with the Shanghai Composite rising 1%.  Euro Stoxx 600 is down 0.1% near midday, while futures are pointing to a lower open for US markets.  The 10-year US yield is down 3 bp at 2.83%.  Commodity prices are mostly higher, with Brent oil up 0.4%, copper up 1.5%, and gold up 0.5%.

There are two important developments today.  First, the recovery in the global equity markets is being challenged.  Second, the yen has strengthened across the board, and is now at its best levels against the dollar since last September’s low.

The MSCI Asia Pacific Index extended Monday’s recovery with another 0.5% gain.  However, looking closer, the momentum faltered.  The benchmark finished in the middle of the range, Japan’s Topix, which had been up a little more than 1% finished down nearly as much.

European markets are nursing modest losses.  Italian and Spanish bourses are underperforming, but the Dow Jones Stoxx 600 is off about 0.2% in late morning turnover.  The S&P 500 is trading lower.  It has rallied 5.6% off the pre-weekend low.  The Dow Jones Industrials have rallied 1400 points during the same time.  Opinion seems divided about the near-term outlook.  The initial recovery has stalled, and the shape and extent of the pullback today may go a long way toward shaping the debate.

Japan’s markets were closed on Monday, and although it initially played catch-up with the world, the gains were reversed as the yen strengthened.  Stops appeared to have been triggered on a break of JPY108.40 and then JPY108.00.  The dollar fell to nearly JPY107.50 in early Europe before tentative stabilizing.  The dollar reached a low near JPY107.30 last September, and carved out a low in the second half of 2016 around JPY100.  Intermittent support is seen near JPY105.

The euro spiked down to JPY132 at the end of last week.  It traded inside the pre-weekend range yesterday and has an outside day in the works today.  A break targets the JPY131 area, but suggests potential toward JPY128-JPY130.  Sterling held last week’s low a little below JPY149.00.  A convincing break may target JPY147. 00.  The Australian dollar is reversing lower against the yen after making a three-day high earlier.  It peaked near JPY85.60 and is now near JPY84.60.  Last week’s low (~JPY84.00) had not been seen since last June.  The Canadian dollar did not find such support and it is now at eight-month lows.

The main economic news today is limited to the UK inflation readings.  Headline CPI eased by 0.5%, the same as January 2017.  This kept the y/y rate steady at 3.0%.  Economists had seen a chance for a 2.9% pace.  CPIH was also unchanged at 2.7%.  The core rate provides fodder to those who now think that inflation will decline more gradually than previously thought and that the BOE is likely to raise rates at the May meeting (March 22 meeting to lay more groundwork).  There is a little more than half the hike already discounted.  Producer prices moderated, though the government’s house price index finished the year on a firm note, rising 5.2% y/y, the same as 2016.

Sterling was firm before the data and extended its gains afterward.  Recall that sterling hit a high near $1.4065 after the BOE’s somewhat hawkish assessment last week.  It fell to $1.3765 ahead of the weekend.  Today’s high completes a 50% retracement of the decline.  The next retracement objective is seen near $1.3950, but the $1.40 area may be more formidable.

For its part, the euro is posting gains for a third consecutive session.  It is above $1.23 for the first time in four sessions.  It has retraced 38.2% of the losses seen since the high a little above $1.2520 was seen at the start of the month.  That retracement was near $1.2325.  The next area of resistance is likely to be encountered near $1.2365.

The South African political drama continues.  After reports yesterday that Zuma would resign, it appears that he is refusing to step down.  This led the ANC to “recall” Zuma.  The next step to removing Zuma would be for the ANC to support a motion of no confidence in parliament.  It seems that Zuma is on the way out but the exact timing is just guesswork.  How much has been priced in already?  We think a lot.  Market may push USD/ZAR lower on the final announcement, but we doubt the rand can extend its gains much beyond 11.50 or so.

Hungary January CPI was steady at 2.1% y/y.  Inflation remains at the bottom of the 2-4% target range.  Q4 GDP will be reported Wednesday, which is expected to grow 4.3% y/y vs. 3.9% in Q3.  Despite the robust economy, we cannot rule out further easing via unconventional measures.  Next policy meeting is February 27.