Markets Mark Time


  • The economic data stream is picking up, but there is an uneasy calm in the markets
  • Sterling has been weakened by two developments, one political and one economic
  • Markit reported softer eurozone flash February PMI
  • The focus in North America will be on the performance of US equities
  • Korea reported trade data for the first 20 days of February; South Africa January CPI rose 4.4% y/y, as expected

The dollar is broadly firmer against the majors as markets await fresh drivers. Stockie and Kiwi are outperforming, while sterling and Aussie are underperforming. EM currencies are mostly softer. TWD and PHP are outperforming, while KRW and ZAR are underperforming. MSCI Asia Pacific was up 0.4%, with the Nikkei rising 0.2%. MSCI EM is up 1% on the day, with Chinese markets closed until Thursday. Euro Stoxx 600 is down 0.6% near midday, while futures are pointing to a lower open for US markets. The 10-year US yield is flat at 2.89% ahead of another day of heavy debt issuance. Commodity prices are mostly lower, with WTI oil down nearly 1%, copper down 0.5%, and gold flat.

The economic data stream is picking up, but there is an uneasy calm in the markets. It is almost as if the dramatic drop in stocks has left many with a sense of incompleteness, like waiting for another shoe to drop. The price action has not clarified the situation very much. The equity markets are stalling in front of important chart points as are yields and the dollar.

The MSCI Emerging Market Index is up nearly one percent, rebounding from yesterday’s 0.55% loss. However, it is struggling to get a toehold above the 50% retracement of the drop earlier this month. MSCI Asia Pacific Index rose a milder 0.4% but is stalled at a similar retracement objective. Of note, foreign investors continue to sell South Korean and Philippines, while buying Taiwan shares as local markets re-opened, and small in buying in Indonesia. Taiwan’s Taiex jumped 2.8%, while Hong Kong bounced back 1.8%, and the A-shares index rose 2.3%.

Europe’s Dow Jones Stoxx 600 is off 0.5% in late morning turnover, and telecom is the only sector that is resisting the selling pressure. The index is generally moving sideways for the fourth session, after stalling at the 38.2% retracement last week. Yesterday the S&P 500 snapped a six-day advance and US shares are a little heavy now.

Bond yields are mixed. Asia-Pacific yields eased and European core rates have slipped, but the peripheral yield are flat to slightly higher. Australia’s 10-year yields fell four basis points and is back through the similar US rate. The drop in yields comes despite news that wages growth was a little stronger than expected in Q4, rising 0.6% q/q for a 2.1% y/y pace. The Australian dollar is wrestling with sterling for the weakest of the major currencies today, off nearly 0.4%. The Aussie has been sold to a new five-day low and appears to be finding a bid near $0.7840.

Sterling has been weakened by two developments. First, some 62 Conservatives have pressed Prime Minister May for a quick and clean break from the EU (hard line). May is expected to clarify the response to the EU’s negotiating position. Second, the UK’s unemployment rate unexpectedly ticked up (4.4% from 4.3%) in the three-months through December for the first time in a couple of years, though the jobless claims fell in January. Employment growth in the last quarter of 2017 was half (88k vs 165k) expected.

Sterling has also slipped to a new five-day low. It is currently testing support near $1.3930. A clean break may spur a move toward $1.3800 in the coming days. The euro, which was turned back from the GBP0.8900 area last week found demand near GBP0.8800.

The euro extended this week’s losses to $1.2300. The $1.2340 area, which was breached yesterday and seemed to cap it today, represents a 61.8% retracement since $1.22 was seen on February 11. A move below $1.2280 would send it back to the month’s low. There is a 744 mln euro option struck at $1.23 that expires today.

Markit reported softer eurozone flash February PMI. The manufacturing PMI fell to 58.5 from 59.6 and the service PMI fell to 56.7 from 58.0. The composite reading of 57.5 (from 58.8) returns the much-watched indicators to November levels, and has begun the whispers that the growth momentum has peaked. New orders, output, and employment eased, though factory gate prices rose at their fastest pace since early 2011. Only country details are available in the flash reading from Germany and France, and the readings for both countries fell.

The dollar is rising against the yen for the fourth session. It approached JPY108 in Asia. Last week, it seemed that the Asian session was likely to sell dollar-yen, but this week, it has come back with an apparent bias toward buying dollars. Japan also reported a softer preliminary manufacturing PMI (54.0 vs. 54.8), which could be linked to the appreciation of the yen.

The focus in North America will be on the performance of US equities. In terms of data, the preliminary Markit PMIs may draw some interest, and existing home sales for January may surprise on the upside (0.5% expected). The FOMC minutes from the January meeting, Yellen’s last, will be released. Although some have tried playing up their significance, we are skeptical. It is clear that the FOMC statement teed up the Fed to hike rates “further” this year. Many suspect the next dot plot will anticipate four hikes this year rather than three.

Perhaps the most important part of the minutes will be references to how the members are thinking about fiscal policy. It also seems clear that official confidence in the strength of the economy and that inflation will move toward its target has grown. Operationally, we remain concerned that only changing policy at FOMC meetings with press conferences, and only having press conferences every other meeting unnecessarily denies the central bank degrees of freedom. We argue that a press conference after every meeting, like the BOJ and ECB hold, makes sense from a communication, transparency, and operational point of view.

The US Treasury will continue raising money this week. It raised $179 bln yesterday and will raise another $50 bln today (five-year notes, and two-year floating rate notes). The Treasury Department has indicated it will sell $441 bln of marketable securities this quarter. It is getting a big chunk out of the way this week.

Korea reported trade data for the first 20 days of February. After slowing in Q4 to single digits, export growth rebounded to 22% y/y in January. So far in February, exports contracted -3.9% y/y but the readings for both months are distorted by the timing of the Lunar New Year holiday. One by-product of the yen’s recent strength against the majors is the rise in JPY/KRW. Korean exporters like this cross above 10 and that’s where it’s been hovering this past week. A sustained move above 10 would boost exports.

South Africa January CPI rose 4.4% y/y, as expected and down from 4.7% in December. This was the lowest rate since March 2015 and puts inflation in the bottom half of the 3-6% target range. This supports the case for lower rates. The central bank started the easing cycle last July with a 25 bp cut to 6.75%, but has been on hold since. If the rand remains relatively firm, we think another 25 bp cut to 6.5% is likely at the next policy meeting March 28.