Dollar and Equities End the Week on a Firm Note

Dollar and Equities End the Week on a Firm Note

  • Improved risk appetite was extended overnight, especially in the equity space
  • Eurozone final September CPI came in at -0.1% y/y, as expected; trade data was soft
  • New Zealand Q3 CPI came in slightly above expectations, but not enough to deter expectations of further easing by the RBNZ
  • Today, India started the second round of important local elections this week
  • Fitch downgraded Brazil one notch to BBB- and kept a negative outlook; Chile hiked rates 25 bp late yesterday to 3.25%, as expected

Price action:  The dollar is broadly stronger against the majors.  The Scandies and sterling are outperforming, while the Antipodeans and the euro are underperforming.  The euro is trading at new lows for the week just below $1.1350, while sterling is holding near $1.5450, driving the EUR/GBP cross back below .7350.  Dollar/yen is trading back above the 119 level.  EM currencies are mostly weaker.  KRW, TWD, and INR are outperforming, while MYR, IDR, and PHP are underperforming.  MSCI Asia Pacific rose 0.4%, with the Nikkei up 1.1%.  China markets rose, with the Shanghai Composite up 1.6% and the Shenzen Composite up 1.3%.  The Dow Jones Euro Stoxx 600 is up 0.8% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is flat at 2.01%, while European bond markets are mostly firmer.  Commodity prices are mostly lower, though oil is up around 1% on the day. 

  • Improved risk appetite was extended overnight, especially in the equity space.  MSCI World is up for the second straight day and for 3 of the past 5 days.  MSCI EM is showing similar price action.  The Shanghai Composite has risen 6 of the past 7 days since Chinese markets reopened from a week-long holiday, adding to the positive equity sentiment.
  • Yet the dollar is rebounding today against most majors and EM currencies.  Perhaps it was the Fed’s Dudley moving Fed lift-off back into play, saying that he favors lift-off this year.  While dovish comments by two Fed Governors earlier this week are noteworthy, we continue to focus on Yellen, Fischer, and Dudley.  Of course, it is all data dependent and we note that there are two more jobs reports before the December 16 FOMC meeting.
  • During the North American session, the US reports September IP and capacity utilization, August JOLTS jobs data, preliminary October Michigan consumer sentiment, and August TIC data.  Canada reports August manufacturing sales and international securities transactions.
  • Eurozone final September CPI came in at -0.1% y/y, as expected.  On the other hand, August trade data came in weaker than expected, as exports fell m/m on a seasonally adjusted basis while imports rose.  Recent German data pointed to some softness, and the ECB meeting next week takes on greater importance after Nowotny’s comments this week.  While no move is expected, Draghi may push back against recent euro gains.
  • New Zealand Q3 CPI came in slightly above expectations, but not enough to deter expectations of further easing by the RBNZ.  Inflation came in at 0.3% q/q, compared with 0.2% expected.  This translates to a 0.4% y/y rate, well below the 1-3% target range.  Markets are split between a cut as early as this month’s meeting or at the December meeting.  One argument for a delay in easing is the somewhat better economic data, including better dairy auction prices, a key component of the country’s exports.  The kiwi is underperforming today, but it has been on a good run so far this month, up 6.3% against the US dollar.
  • India started today the second round of important local elections this week.  On Monday, voters in the state of Bihar began the election process for the legislative assembly that will last for the next three weeks, with the second stage started overnight.  Note that the population of Bihar is just over 82 mln people, around the size of Germany.  These elections matter because it will be an important indicator of the odds of the government coalition, led by Modi’s BJP, gaining control of the upper house.  The broad government coalition, NDA, already has control of the lower house after its 2014 victory.  Reforms have been stymied by opposition in the upper house, and it’s unclear if the NDA will be able to secure a broader victory in 2018.  This is the first of many tests for a country where investors have relatively high hopes for.
  • Fitch downgraded Brazil one notch to BBB- and kept a negative outlook.  This really shouldn’t come as a big surprise, as the BBB rating it had was too high.  Our own sovereign rating model now has Brazil at BB-/Ba3/BB- so downgrade risk remains very strong.  S&P has it at BB+, while Moody’s has it at Baa3 with an inexplicable stable outlook.  Markets might show some relief that Fitch didn’t cut by two notches to BB+, but we think another cut is in the cards to BB+.  Many funds and indexes require a country to have an investment grade rating from 2 out of 3 rating agencies in order to be investible.  S&P is already at sub-investment grade.  Frankly, we think all 3 will eventually get there but Fitch’s negative outlook suggests it will move before Moody’s does given its stable outlook.  The timing is anyone’s guess, but we think it will eventually happen.
  • Central bank of Chile hiked rates 25 bp late yesterday to 3.25%, as expected.  CPI rose a lower than expected 4.6% y/y in September, down from 5% in August but still above the 2-4% target range.  Taken in conjunction with the firmer peso, we suspect that the tightening cycle will not be aggressive.
  • Colombia reports August retail sales and IP.  The former is seen rising 2.6% y/y and the latter is seen rising 1.0% y/y.  Colombia followed Peru with the start of its tightening cycle last month, but here too, we think the pace of tightening will be modest.  This is especially true in light of recent EM FX firmness.  Next policy meeting is October 30, we think rates will be kept steady. then.