- The PBOC fixed the yuan lower for the seventh consecutive session
- Service sector purchasing managers reports dominate the economic news
- The US and Canada both report November trade figures today
- The Korean won held up fairly well today, despite news that North Korea may have detonated some sort of nuclear weapon
- Negative EM sentiment continues to reign
Price action: The dollar is broadly stronger against the majors. The yen is the exception, outperforming again with dollar/yen making a new cycle low near 118.35. This is the lowest level since October 15. The dollar bloc and the Norwegian krone are underperforming. The euro is testing yesterday’s low near $1.0710, while sterling made a new cycle lows near $1.4620 before bouncing slightly. EM currencies are broadly weaker. THB, PHP, and INR are outperforming while MYR, RUB, and ZAR are underperforming. MSCI Asia Pacific was down 0.9% on the day, with the Nikkei down 1%. MSCI EM is down 1%, though the Shanghai Composite was up 2.3% and the Shenzen Composite was up 2.6%. Euro Stoxx 600 is down 1.4% near midday, while US futures are pointing to a lower open. The 10-year UST yield is down 6 bp at 2.18%, while European bond markets are mostly firmer. Commodity prices are lower, with oil down 3-4% and copper down 1%.
The US dollar and Japanese yen have begun the year on a firm note, as have bonds, while equities markets have moved lower. This continues unabated today.
Another consistency is the weakness in the Chinese yuan. The PBOC fixed the yuan lower for the seventh consecutive session. The yuan is off about 0.67% today. This doubles the decline of the first two sessions of the week and leaves the yuan off one percent this week. While the pace of decline is commanding attention, the yuan has fallen less against the dollar this week than the closely managed Singapore dollar, Korean won, Taiwanese dollar, Malaysian ringgit, and the Indonesian rupiah, for example. Among the majors, it has fallen less than the euro, dollar-bloc currencies, and the Scandies. Looking further back, we note that CNY has only weakened 5% vs. USD over the past twelve months, making it one of the best performers in EM in that period.
This is not to dismiss the decline in the onshore yuan. It is simply to recognize that the yuan’s decline against the dollar that is spurring the spillage of so much ink is not so spectacular. It is a clear, even if managed, consequence of decoupling China’s monetary policy from the US. The exchange rate is an important channel.
The problem lies with the uncertainty over the intentions of Chinese policy makers. The market anticipates more depreciation (stronger dollar). The offshore yuan (CNH) is off a little more than 1% on the day and 2.2% for the year. The gap between the two stands at a new record high. The PBOC has tried intervening through state-owned banks with little lasting impact. It has tried the time-tested “killing a chicken to scare the monkeys” tactic by suspending a couple foreign banks for ostensibly facilitating speculation against the offshore yuan.
It is difficult to see how the PBOC can address this without sending clear signals that it does not seek further depreciation. Focusing on the yuan’s stability against a basket is not particularly useful. When the dollar is rising against that same basket, the bearishness toward the yuan becomes more entrenched.
News that China’s officials will likely extend the ban on share sales by large investors, with new rules likely in the coming days, helped lift Chinese equities today. The CSI 300 gained 1.75%, though Chinese shares that trade in Hong Kong fell almost 1%. The gains buck the global trend. The MSCI Asia-Pacific Index is off almost 1% and the Dow Jones Stoxx 600 for Europe is off even more near midday. Participation in Europe may be light due to the religious holiday.
The Korean won was among the weakest Asian currencies today, slipping 0.8% due partly to news that North Korea detonated some sort of nuclear weapon. Generalized EM selling was another factor, though the quarter point loss in the equity market is among the smallest losses recorded in the region today. Pyongyang claims it was a hydrogen bomb, but many analysts are skeptical that it has the wherewithal to produce this more powerful version. Still, we are reminded of the nuclear tests conducted by Pakistan and India during the depths of the Asian Crisis. While the long-term investment implications are likely to be limited (as Pyongyang’s previous nuclear tests have proven), the short-term impact will likely keep markets extra jittery.
One of the main beneficiaries of recent yen weakness is Korea. The key yen/won cross has moved above the important 10 level for the first time since September. It could test the August high near 10.30, especially if the won sees some catch-up weakness as EM sentiment remains sour. This would help Korean exporters at the margin, who have gotten squeezed by the weak yen.
Service sector purchasing managers reports dominate the economic news. Caixin reported December China services PMI at 50.2 vs. 51.2 in November. The composite reading came in at 49.4 vs. 50.5 in November, reversing the November gained that had brought it back above the 50 boom/bust level after being below it in August through October. Earlier this week, Caixin manufacturing PMI came in at 48.2 vs. 48.9 expected and 48.6 in November.
The eurozone service PMI was better than the flash suggested at 54.2 rather than 53.9. The composite reading also ticked up to 54.3 from 54.0. This is a new cyclical high, suggesting a firm end to 2015. Germany’s flash service sector reading was bumped up to 56.0 from 55.4. This is the strongest since July 2014. France disappointed. Its service PMI fell to 49.8 though the flash reading had put it at 50. It is the first sub-50 reading for France’s services since January.
Spain followed France’s disappointment. The service PMI had been expected to slip a little, but it fell to 55.1 from 56.7. This matches the lowest reading for 2015. The survey was conducted before the national election, but it may have still weighed on sentiment. New business measures slipped. The political uncertainty in both Catalonia and the nation as a whole may force new elections. This comes at the same time that the economy appears to be losing some momentum.
Italy, on the other hand, followed Germany with an upside surprise. Italy’s service PMI reached 55.3 from 53.4. The Bloomberg consensus was for 53.6. It is the highest since March 2010. Of note, the employment sub-index is at an eight month high and new business improved. The composite reading of 56.0 is a new cyclical high.
The UK’s report was mildly disappointing. The service PMI slipped to 55.5 from 55.9, which was a touch below expectations. The composite reading, which had improved in October and November, slipped back to 55.3, the lowest reading for the quarter. This week, the manufacturing and services PMI disappointed, with the index covering the smallest part of the British economy (construction) doing a bit better. Expectations for a BOE rate hike continue to be pushed out, with an investment bank or two announcing forecast changes today.
The US and Canada both report November trade figures today. The focus in the US, however, will be on the ADP employment estimate (consensus is just below 200k), the service sector ISM, durable goods orders and late in the session, the minutes from the December FOMC meeting. Despite the equity market sell-off and the string of weaker data that prompted the Atlanta Fed to slash its Q4 GDP tracker to 0.7%, expectations for the March FOMC meeting have barely changed since December 18, before the holidays sapped market liquidity and participation.
The euro is pinned in narrow ranges near yesterday’s lows. It has retraced a little more than 61.8% of the rally spurred by the ECB’s disappointment a month ago. The next technical objective is near $1.0680. The dollar extended its losses against the yen, falling to JPY118.35 after being repulsed when it tried to resurface above JPY119. A break of JPY118, which matches the mid-October spike low, would be significant, with nothing on the charts until JPY116.20. Sterling’s slide was also extended. It fell to $1.4620, new eight-month lows. It is a cent from last year’s low. Resistance is seen in the $1.4600-1.4700 area. The dollar-bloc currencies and most emerging market currencies remain under strong downward pressure.
Taiwan reported December CPI at 0.1% y/y vs. the expected 0.45% and 0.53% in November. The central bank has no formal inflation target, but the soft economy is likely to keep the easing cycle alive in 2016. Taiwan then reports December trade Friday. Exports are expected at -13% y/y and imports at -12.5% y/y. Weak export orders in recent months suggest little recovery in exports (and perhaps growth in general) in H1 2016.
Negative EM sentiment continues to reign. The dollar is breaking above key levels for many EM currencies, too many to recount here. The usual culprits can be rounded up: the strong dollar, worries about Fed tightening, low commodity prices, and concerns about slow global (and Chinese) growth. These drivers are not going away anytime soon, and so we see 2016 to be a continuation of the 2015 bear market for EM.