Turn Around Tuesday Began on Monday

<div><a href="https://blogger.googleusercontent.com/img/a/AVvXsEjb9h1AMLfL4XriZ9yyiBIJGjvZR0T_k_nyIjXirB_qlVNWccwcX-QoqaBtNtQWFAtKr5Ed30xYPlWtH6NCzhxlWM87rdjG4d58q9sXCGRRg_gaInIHHUhbsWYDNLVfoUfXdQ-WgR8NQ8KwbDjBiRZaXo7Wy9zPDFYq_wZIKjtwA36EIWnosSmdMgdlfw=s1012"><img alt="" border="0" data-original-height="720" data-original-width="1012" src="https://blogger.googleusercontent.com/img/a/AVvXsEjb9h1AMLfL4XriZ9yyiBIJGjvZR0T_k_nyIjXirB_qlVNWccwcX-QoqaBtNtQWFAtKr5Ed30xYPlWtH6NCzhxlWM87rdjG4d58q9sXCGRRg_gaInIHHUhbsWYDNLVfoUfXdQ-WgR8NQ8KwbDjBiRZaXo7Wy9zPDFYq_wZIKjtwA36EIWnosSmdMgdlfw=s400" width="400" /></a></div><p><b><span>Overview:&nbsp;</span></b><span>&nbsp;The recovery of the NASDAQ yesterday and the slight easing of the US 10-year Treasury yield is setting the stage for today's market moves.&nbsp; That said, Japan's equities had to play catch-up after being on holiday yesterday and the yen's strength took a toll. Among the large Asia Pacific bourses, only Taiwan, South Korea, and Australia rose.&nbsp; It is difficult to detect the impact of what appears to be the second test of North Korea's hypersonic missile in about a week.&nbsp; Europe's Stoxx 600 is snapping a three-day decline with broad gains led by information technology and consumer discretionary sectors.&nbsp; US futures are also trading modestly higher. After probing 1.8% yesterday, the US 10-year yield is flat near 1.76%.&nbsp; &nbsp;European yields are narrowly mixed. The dollar is trading heavier against all the majors but the yen and most emerging market currencies, except the Taiwanese dollar and Turkish lira.&nbsp; The JP Morgan Emerging Market Currency Index is up small, which if sustained would be the third rise in four sessions.&nbsp; Gold is higher for the third session and is back above the 200-day moving average (~$1801).&nbsp; Last week's high was a little above $1830.&nbsp; Oil is recovering from yesterday's setback and February WTI is again poised to challenge the $80-a-barrel level.&nbsp; Natgas prices in the US and Europe are off more than 1%.&nbsp; &nbsp;Iron ore jumped nearly 3% to recoup its past two sessions of losses plus some.&nbsp; Copper is firmer to recover a little more than half of yesterday's 1.3% decline.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p> <p><b><span>Japan continues to struggle against deflationary impulses seen clearly in the GDP deflator (-1.2% in Q3) and measures of CPI excluding fresh food and energy (-0.6% in November).&nbsp;&nbsp;</span></b><span>Wages have been flat for nearly 20 years.&nbsp; However, a BOJ survey released earlier today showed that inflation expectations rose to their highest level in 13-years.&nbsp; They see 5% inflation next year, according to the quarterly survey, and 3% a year on average over the next five years. There is some speculation that the BOJ will drop its characterization of downside risks for inflation at next week's policy meeting.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>Australia reported November trade figures and retail sales.&nbsp;</span></b><span>&nbsp;The former disappointed while the later was twice as strong as expected.&nbsp; Australia's trade surplus fell for the fourth consecutive month, and it may suggest that the positive terms of trade shock is easing.&nbsp; The average monthly surplus through November last year was A$10.44 bln.&nbsp; November's surplus was A$9.4 bln.&nbsp; In the first 11 months last year, the average trade surplus was A$5.93 bln and in 2019 it was almost A$5.7 bln.&nbsp; Separately, the retail sales soared by 7.3% month-over-month.&nbsp; It followed a 4.9% rise in October and 1.3% in September. That provides an average in the past three months of 4.5%.&nbsp; In the three months through August, Australian retail sales fell by an average of 2.1%, as the social restrictions and lockdowns pinched.&nbsp;<o:p></o:p></span></p> <p><b><span>The dollar held JPY115.00 yesterday and so far, the recovery has been limited to slightly more than JPY115.40.&nbsp;</span></b><span>&nbsp;An option for around $440 mln at JPY115.50 expires today.&nbsp; It appears that the dramatic slide in stocks overwhelms the impact of higher rates.&nbsp; Consider that the 30-day correlation between the change in the exchange rate and change in the S&amp;P 500 is near 0.6%, while the 100-day correlation is half as much.&nbsp; The correlation of the change in the exchange rate and the change in the US 10-year yield has slipped to about 0.55%&nbsp;over the past 30 days.&nbsp; The 100-day correlation was around 0.65% before Xmas.&nbsp;<b>&nbsp;The Australian dollar is firm within yesterday's range.</b>&nbsp; It is holding below $0.7200.&nbsp; A move above there may encounter resistance near $0.7220. It appears to be a consolidative session.&nbsp;&nbsp;<b>The Chinese yuan edged a little higher, but it remains in last Thursday's range (~CNY6.3675-CNY6.3850).</b>&nbsp; The reference rate was set for the dollar a little softer than expected at CNY6.3684 (compared with the median projection in the Bloomberg survey for CNY6.3695).&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>Europe</span></b><span><o:p></o:p></span></p> <p><b><span>US-Russian talks did not lead to a narrowing of the differences.&nbsp;&nbsp;</span></b><span>It seems clear that the key Russian demand is to be giving iron clad assurances that Ukraine (and Georgia) will never be allowed to join NATO.&nbsp; So even if the other demands were met, without this one, Russia cannot be secure.&nbsp; Talks continue today with NATO.&nbsp;<o:p></o:p></span></p> <p><b><span>The eurozone aggregate November industrial production figures will be reported tomorrow.&nbsp;</span></b><span>&nbsp;Recall that last week, Germany and France disappointed.&nbsp; German industrial output was expected to rise by 1%.&nbsp; Instead, it fell by 0.2%.&nbsp; French industrial production was expected to rise by 0.5% but fell by 0.4%.&nbsp; Spain offered a big upside surprise today.&nbsp; Its industrial output jumped 4.5% in the month, more than 10x what economists projected.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>In a little less than two weeks, Italy's presidential selection process gets underway.</span></b><span>&nbsp; Italian politics is slowly making its way back into the market's field of vision.&nbsp; The problem is that if Draghi becomes president, it leaves the premier role open.&nbsp; Polls show the right League and Brothers of Italy could possibly secure it over the center-left PD.&nbsp; The parties on the right tend to be more hostile to the EU.&nbsp; If Draghi does not become president, the right may secure it for Berlusconi. Draghi, who is not leading a political party, would likely be out in next year's election.&nbsp;<o:p></o:p></span></p> <p><b><span>Revelations about a party in 10 Downing Street May 2020 encouraged by PM Johnson hours after a social gathering were banned is the latest blow against the government.&nbsp;</span></b><span>&nbsp;The&nbsp;cavalier attitude and hypocrisy are undermining support for Johnson.&nbsp; It is emboldening Labour, which is running ahead in some polls.&nbsp; Labour is taking the initiative and is forcing a parliament debate on dropping the sales tax on energy bills.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The euro has been confirmed to about a third of a cent in the upper half of yesterday's range.&nbsp;</span></b><span>&nbsp;The North American market took the euro toward the lower end of its recent range (~$1.1270).&nbsp; The market seemed to have plenty of reasons to unwind the post-US jobs data gains, but it snapped back and settled above $1.13.&nbsp; Today's high is slightly above $1.1350.&nbsp; It pulled back in early European turnover but looks poised to test the highs again.&nbsp; Still, given the more aggressive Fed posture being discounted, the political backdrop with Russia and Italy, we continue to think the euro is vulnerable.&nbsp;&nbsp;<b>Sterling is trying to establish a foothold above $1.36.</b>&nbsp; It reached $1.3620 in late Asia, its best level since November 4 before the BOE's disappointment (stood pat).&nbsp; There has been no follow-through buying in the European morning.&nbsp; Initial support is seen near $1.3580.&nbsp; Sterling's outperformance has seen the euro slip to new lows since February 2020.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>America</span></b><span><o:p></o:p></span></p> <p><b><span>The Fed's Vice Chairman Clarida is stepping down at the end of this week, a couple weeks before his term ends.&nbsp;&nbsp;</span></b><span>He already has a teaching gig lined up.&nbsp; Although no official reason was given for the early departure, many are linking it to new disclosures that he first sold $1-$5 mln of an equity fund and then bought it back a couple days later, just before the Fed announced emergency measures to combat the disruption trigged by the pandemic.&nbsp; At first the Fed had said it was a pre-scheduled rebalancing, but it appears to be more than that now.&nbsp; He is the third Fed official to resign under such a cloud.&nbsp; No doubt the issue will be raised in Powell's confirmation hearings today.&nbsp; While the focus is on Fed officials, note that members of the House of Representatives, Senators, and judges (and their immediate families) are not held as high a standard as Fed officials.&nbsp; Meanwhile, President Biden is expected to announce additional nominations to the Federal Reserve board shortly. FOMC voting members and perceived hawks Mester and George also speak today, before Powell's testimony.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The US and Canada have light data calendars today, while Mexico reports November industrial output (0.6% expected the same as October) and Brazil reports IPCA inflation (which is expected to have eased for the second consecutive month).&nbsp;</span></b><span>&nbsp;The market has almost 300 bp of tightening by Brazil discounted over the next three months.&nbsp; This seems to imply two more 150 bp hikes.&nbsp; While the first, on February 2 has been pre-committed, the second one seems somewhat less likely.&nbsp; Note that the swaps curve is pricing in a cut in the second half of the year.<o:p></o:p></span></p> <p><b><span>The US dollar bounced from CAD1.26 yesterday, which we suggest is the potential neckline of a head and shoulders topping pattern that would project toward CAD1.2250.&nbsp;</span></b><span>&nbsp;The bounce carried the greenback to almost CAD1.27, but its now back to around CAD1.2640. The intraday momentum indicators suggest CAD1.26 is safe for another day.&nbsp;&nbsp;<b>The greenback is pinned near its recent trough against the Mexican peso.&nbsp;</b>&nbsp;The low on New Year’s Eve was about MXN20.3270.&nbsp; Today's low is slightly below MXN20.36.&nbsp; &nbsp;Dollar bounces toward MXN20.50 last Friday and yesterday were sold.&nbsp; The 200-day moving average may be the next downside target.&nbsp; It is near MXN20.2750.&nbsp;</span><span>&nbsp;</span>&nbsp;</p><p><br /></p><p><span>Disclaimer</span></p><div>
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