Equity Rally Continues, Dollar Corrects

  • Global equity markets have got their mojo back
  • The BOE decision is due out shortly; October UK manufacturing PMI was a much weaker than expected 51.1
  • The US reports weekly jobless claims, Q3 nonfarm productivity and unit labor costs, September construction spending, and October ISM manufacturing PMI
  • For EM, it’s all about political risk right now
  • Several emerging Asian countries reported weaker than expected PMI data; CNB is expected to hike rates 25 bp to 1.75%

The dollar is mostly weaker against the majors as equity markets continue to rally.  The Antipodeans are outperforming, while the yen and Loonie are underperforming.  EM currencies are mostly firmer.  ZAR and PLN are outperforming, while TWD and MYR are underperforming.  MSCI Asia Pacific was up 0.3%, with the Nikkei falling 1.1%.  MSCI EM is up 0.9% so far today, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is up 0.5% near midday, while US futures are pointing to a higher open.  The US 10-year yield is up 2 bp at 3.17%.  Commodity prices are mixed, with Brent oil down 1%, copper up 0.6%, and gold up 0.8%.

Global equity markets have got their mojo back.  With the S&P 500 posting the first back to back gains since mid-September, Asian markets went with the momentum, though Japan underperformed as telecoms were hit on news of a price cuts of 20-40% by a leading provider.  European stocks are also mostly up so far today.  The dollar is correcting lower.  After posting a marginal new high for this move yesterday near 97.20, the Dollar Index has fallen back today.

The BOE decision is due out shortly.  Since it just hiked rates back in August, no one is expecting any change in policy today.  Indeed, recent softness in the UK economic data has pushed out expectations for the next hike.  Implied yields on short sterling contracts show that the next 25 bp hike is not fully priced in until June 2019.  Several weeks ago, it was fully priced in by March 2019.  The hike after that one isn’t fully priced in until June 2020.

The BOE will also issue its quarterly inflation report.  We expect the BOE to take a very cautious tone, especially with Brexit uncertainty remaining high and taking a toll on business confidence.  Sterling staged a little rebound yesterday on reports of a Brexit deal shortly.  Today, it was reported that the EU has tentatively agreed to give UK financial services companies access to European markets after Brexit.

Ahead of the BOE decision, Markit reported much weaker than expected October UK manufacturing PMI.  It came in at 51.1 vs. 53.0 expected and 53.8 in September.  This is the lowest since July 2016, right after the Brexit referendum.  Construction PMI will be reported Friday, with services and composite PMIs to be reported Monday.

Sterling has staged a nice recovery off the $1.27 lows of this week on Brexit optimism.  The weak PMI reading has stalled its bounce, and we note that a break of the $1.30 area is needed to signal that a larger correction may be at hand.

During the North American session, the US reports weekly jobless claims, Q3 nonfarm productivity and unit labor costs, September construction spending, and October ISM manufacturing PMI.  Yesterday’s ADP report of +227k new private sector jobs will likely have some looking for a strong NFP Friday, where consensus is currently at +195k.

For EM, it’s all about political risk right now.  Yesterday, TRY, MXN, ZAR, and BRL all got hammered for a variety reasons.  In Turkey, it was an unwarranted tax cut.  In Mexico, it was continued fallout from the airport fiasco as Fitch moved the outlook on its BBB+ rating from stable to negative.  In South Africa, it was news that former Finance Minister and current Home Affairs Minister Gigaba may have lied under oath whilst testifying about corruption.  Lastly, in Brazil it was Bolsonaro’s congressional ally warning that pension reforms won’t pass anytime soon.

These developments come within a generally negative EM backdrop, leading to significant underperformance for these four currencies yesterday.  The dollar’s correction today has allowed them to recoup some of those losses.  Yet EM data has been running soft lately and likely reflects slowing global growth.  Today, weaker than expected PMI data from several emerging Asian countries supports our notion that many EM central banks will try to remain dovish in the face of downside risks.  Taiwan, Malaysia, and Thailand all reported PMI readings below the boom/bust 50 level.  Surprisingly, Caixin’s China PMI came in at 50.1, staying above 50 despite the weaker than expected official PMI yesterday.

Czech National Bank is expected to hike rates 25 bp to 1.75%.  If so, it would be the fourth straight hike and the seventh overall in this tightening cycle.  CPI rose 2.3% y/y, above the 2% target but still within the 1-3% target range.  The CNB has been one of the most aggressive in hiking rates, and it is doing so not to support the currency but to cool off a very strong economy.