Markets Calmer, Dollar Firmer


  • Chinese shares and the yuan stabilized with the apparent help of the government’s guiding hand
  • The news stream is light today but there are four developments to note in Europe
  • The North American calendar is light
  • EM assets remain under pressure

Price action: The dollar is mostly stronger against the majors even as some semblance of calm returns to the markets. The yen is outperforming again, with dollar/yen trading just above 119. The Scandies and the Kiwi are underperforming. The euro is trading below $1.08 to its lowest level since the December 3 ECB meeting, while sterling is making new cycle lows near $1.4660. EM currencies are mostly weaker. PHP, IDR, and CNY are outperforming while TRY, RUB, and the CEE currencies are underperforming. MSCI Asia Pacific was down 0.4% on the day, with the Nikkei down 0.4%. MSCI EM is down 0.3%, as the Shanghai Composite was down 0.3% while the Shenzen Composite was down 1.9%. China’s state-owned funds were reportedly supporting the equity market, while regulators suggested that the 6-month selling ban for major investors would be extended beyond this week. Euro Stoxx 600 is down 0.2% near midday, while US futures are pointing to a lower open. The 10-year UST yield is down 1 bp at 2.23%, while European bond markets are mostly firmer. Commodity prices are mixed, with oil down slightly while copper is up 1.3%.


Chinese shares and the yuan stabilized with the apparent help of the government’s guiding hand, but global markets are still on the defensive.  The euro has extended yesterday’s decline through the $1.08 level.  The next immediate technical objective is near $1.0730.

The greenback is firmer against most major and emerging market currencies.  The chief exception is the Japanese yen.  Lower equity prices and the continued pullback in US yields are often associated with a stronger yen.  The dollar has thus far remains above yesterday’s low against the yen (~JPY118.70), but only just.  A new low, albeit marginal, toward JPY118.30, is possible in the North American session, especially if the S&P 500 extends the 10 point decline in electronic trading.

Chinese officials apparently recognized the need to prevent the stock market weakness from spilling over and fueling expectations of sharp yuan losses.  Intervention in the foreign exchange market through state-owned banks has been widely cited.  While the onshore yuan stabilized, the offshore yuan has not.  The spread between the two is at record levels.  Last summer, the IMF urged China to reduce the gap in order to provide a proper hedging market for central banks who chose to put reserves in yuan with it being included (as of later this year) in the SDR.

Reports also indicated that through a number of state-owned and state-guided entities likely intervened in the equity market as well.  The buying would likely have been concentrated among the blue-chips (state-owned banks and industrial combines).  This is reflected by the fact that the CSI 300, an index of large companies, managed to eke out a small gain (almost 0.3%), while the Shanghai Composite ended a volatile session off nearly as much and the Shenzhen Composite lost another 1.8% after yesterday’s more than 8% drop.

In addition to the reports of material intervention, officials may tap other levers.  For example, the ban on large equity investors selling shares is to expire at the end of the week, and China’s key regulator suggested that the ban may be extended.  Also, some reports suggest that at least ten companies reported that their executives would not sell their holdings for the next 6-12 months.

Although most Asian shares were lower, the gains in Korea, Malaysia, and Indonesia kept the losses in the MSCI Asia-Pacific Index modest at about 0.3%.  The MSCI Emerging Market equity index was down about the same percentage.  European markets opened higher, but quickly retreated and many markets, including the DAX and CAC, are extending yesterday’s losses.  The Dow Jones Stoxx 600 is off about 0.35%, led by consumer discretionary and material/energy sectors.  Telecoms are bucking the trend, gaining about 0.25%.

The news stream is light today but there are four developments to note. First, the German labor market report showed a strong finish to 2015. The unemployed queues fell 14k (Bloomberg consensus was for an 8k decline), which matches the revised decline in November. The unemployment rate was unchanged at 6.3%. What is less obvious is that 43 mln workers are the most since unification, and the number of unemployed has fallen below 2 mln for the first time as well. We note that new jobless claims in Spain fell by 55.8k in December, which is also a little more than expected. It is the largest decline since July.

Second, following the disappointing German figures yesterday, the eurozone December CPI was unchanged at 0.2%. The core rate was also unchanged at 0.9%. Prior to the German report, the consensus expected a small increase.

Third, the UK construction PMI rose to 57.8 from 55.3. The consensus expected a smaller increase (~56). It averaged 57.3 in Q4 after 58.1 in Q3. Sterling fell to its lowest level since last April yesterday just below $1.4665. It is trading below that now, but the intra-day technical suggest a potential retest of the $1.4720 area in the North American session.

Fourth, Norway reported a disappointing manufacturing PMI (46.8 vs. 47.5 in November). It is the lowest since August. While the weakness in the krone buys officials some time, a rate cut in the middle of March (the next time that the Norges Bank meets) is likely. Separately, we note that the weakest of the major currencies today is the Swedish krona following reports yesterday that the central bank was preparing to intervene.

The North American calendar is light. US auto sales are expected to have reached the 18 mln annual vehicle pace for the fourth consecutive month in December. Last year appears to have been a record year of sales. Canada reports industrial and raw material price indices. The real challenge Canada faces is not prices but growth. Canadian banks’ chief economists provide 2016 economic outlooks today, while Bank of Canada Governor Poloz speaks on Thursday.

Although the markets seem to reward dispassionate analysis, there is a strain of superstition that creeps in from time-to-time. The sharp equity market decline on the first day of trading for a new year is seen by some as some sort of omen. It is not. According to a study cited on Bloomberg, since 1904, the direction of the first day predicts the direction of the market for the year about half the time, which is what one would expect if it was random. Moreover, the magnitude of the move adds nothing to its predictive value.

EM assets remain under pressure. The year has changed but the negative backdrop for EM has not. Weak global growth, low commodity prices, Fed tightening, and a strong dollar continue to point to further EM stresses ahead. USD/CLP made a new cycle high yesterday to trade at its highest level since 2003. Other EM currencies are likely to follow suit in the coming weeks. USD/BRL is back above 4.0, while USD/TRY is today threatening the 3 area. On the equity side, MSCI EM is down for the second straight day, and has fallen in 5 of the past 7 days.

In Brazil, some were hoping that the congressional recess would offer a break from negative political headlines. Unfortunately, that is not the case. Former President Lula has been ordered to testify as a witness on January 25, regarding jailed lobbyist Paes dos Santos. To complicate matters, Lula’s son is involved in the investigation. If Lula is hoping to regain the presidency in 2018, this won’t help matters but for investors, this would be a medium-term positive if it keeps the PT out of power in the next election.

Colombia reports December CPI, and is expected to rise 6.78% y/y vs. 6.39% in November. This would be a new cycle high, and puts it even further above the 2-4% target range. The next policy meeting is January 29, and another 25 bp rate hike to 6% appears likely. While the economy is still struggling to gain traction as oil prices fall, the central bank is clearly acting to maintain its credibility. EM tightening is shaping up to be divided along regional lines, with Latin America tightening even as Asia and Eastern Europe remain largely in easing mode.