Debt Markets Calm

<div><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXxURztF_WSiDna-_-wPNKiqfGhBHTPk69OhKC4-QVEn7ueT-YHLrLQ1hK9psy7lTGaIeX3VOazx4KW2kQFuGH9ijaW1QAY2TB6epKn_UzIZZE3qgy6TyGtGAzOqr36hHGPzv2KdEyUh4P7tA6goxJCIm65r1_NbDo1VSrGxKrDCfh-GnAUJ-GmN_1Ww/s823/DXY.PNG"><img alt="" border="0" data-original-height="659" data-original-width="823" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXxURztF_WSiDna-_-wPNKiqfGhBHTPk69OhKC4-QVEn7ueT-YHLrLQ1hK9psy7lTGaIeX3VOazx4KW2kQFuGH9ijaW1QAY2TB6epKn_UzIZZE3qgy6TyGtGAzOqr36hHGPzv2KdEyUh4P7tA6goxJCIm65r1_NbDo1VSrGxKrDCfh-GnAUJ-GmN_1Ww/s400/DXY.PNG" width="400" /></a></div><p><b><span>Overview:&nbsp;</span></b><span>A calmer European debt market and the second consecutive decline in the German two-year yield have weighed on the euro.&nbsp; It briefly dipped below&nbsp; $1.14 in the European morning.&nbsp; European bond benchmark yields are softer and most peripheral premiums over Germany have narrowed.&nbsp; Bonds in the Asia-Pacific area rose sharply after the sell-off seen in Europe and the US yesterday.&nbsp; Australian and New Zealand 10-year yields jumped 12 and 10 bp, respectively.&nbsp; The JGB benchmark poked above 0.20% and the BOJ has not shown its hand.&nbsp; The US 10-year is around 1.93% as the 2% psychological level draws near.&nbsp; Equity markets are mostly higher.&nbsp; In the East, China, Hong Kong, and India were the exceptions.&nbsp; Europe's Stoxx 600 is extending yesterday's gains but has yet to take out the pre-weekend high.&nbsp; US futures are firmer.&nbsp; The dollar has edged higher, though sterling, where Gilts are under pressure, and the Swiss franc are the most resilient.&nbsp; The Norwegian krone, Canadian dollar, and Japanese yen are the heaviest.&nbsp; Emerging market currencies are mostly lower. There the euro's weakness seems to be a drag on most eastern European currencies, including the Polish zloty, where the central bank is expected to deliver a 50 bp hike (to 2.75%).&nbsp; The rouble and South African rand are up about 0.4%, helping to lift the JP Morgan Emerging Market Currency Index.&nbsp; Turning to commodities, the rally in gold appears to be stalling after a two-day, $15 advance.&nbsp; Oil is pulling back with the March WTI contract slipping below $90.&nbsp; US natural gas prices have steadied after falling by around 25% over the past three sessions.&nbsp; Europe's benchmark has recouped most of the 5% lost yesterday.&nbsp; Iron ore prices are extending their rally that began in mid-December.&nbsp; Today is the sixth consecutive gain.&nbsp; Copper is moving in the opposite direction to probe the 200-day moving average near $439.<o:p></o:p></span></p><p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p><p><b><span>There are three developments in Japan to note.&nbsp;&nbsp;</span></b><span>First, the US and Japan struck a deal to lift the 2018 steel tariffs (25%) starting April 1.&nbsp; It will allow 1.25 mln tons of steel a year to be shipped to the US without the levy.&nbsp; Second, household spending rose by 0.1% in December, helping the year-over-year rate improve to -0.2% from -1.3%.&nbsp; Yet it remains weaker than expected, and part of the reason why may be the unexpected weakness in income as winter bonuses were cut.&nbsp; Third, seasonal patterns held, and Japan's current account balance deteriorated in December from November.&nbsp; The trade deficit was smaller but still larger than expected.&nbsp; The key driver of the deterioration was the decline in primary income.&nbsp; The report also showed that Japanese investors were net sellers of US and European bonds.&nbsp; China was a net buyer of JPY1.04 trillion of Japanese debt, the most since August 2016.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Taiwan lifted its ban on most food imports from Japan's Fukushima regions.&nbsp;</span></b><span>&nbsp;The ban will be lifted toward the end of next week.&nbsp; Only a few countries have maintained the ban since the 2011 meltdown (China, South Korea, and Taiwan).&nbsp; This could be a risky move politically.&nbsp; A 2018 referendum found most Taiwanese were in favor of keeping the ban.&nbsp; When the Taiwanese government lifted its ban on US pork with traces of ractopamine, consumers boycotted, and US pork sales slumped.&nbsp; Local elections will be held in November.&nbsp; Taiwan is trying to enhance its candidacy for the Comprehensive and Progressive TransPacific Partnership (CPTPP).&nbsp; While some members welcome Taiwan, many are reluctant to antagonize Beijing.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>The US dollar is at a six-day high against the Japanese yen, probing the JPY115.50 area.</span></b><span>&nbsp; The high from late January is nearer JPY115.70.&nbsp; There is an expiring option for $350 mln at JPY115.65 today and another for $610 at JPY115.80 that expires tomorrow.&nbsp; The market remains wary of unscheduled BOJ action to defend the 0.25% yield-curve control cap on the 10-year JGB.&nbsp; The&nbsp;<b>Australian dollar is trading a little firmer.&nbsp;</b>&nbsp;It extended yesterday's gains to almost $0.7140.&nbsp; It rose in the first four days last week before shedding almost 1% before the weekend.&nbsp; Last week's high was near $0.7170.&nbsp; A gain above the $0.7180 would lift the technical tone.&nbsp;&nbsp;<b>The greenback has edged higher against the Chinese yuan for the second consecutive session for the first time this year.&nbsp;&nbsp;</b>The gain is modest, but it did manage to close the gap from January 12 that extended to a little above CNY6.37.&nbsp; The PBOC set the dollar's reference rate at CNY6.3569, slightly lower than yesterday, but the market expectations rose from CNY6.3328 to CNY6.3555.&nbsp; Note that Beijing eased property loan curbs for public rentals.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Europe</span></b><span><o:p></o:p></span></p><p><b><span>ECB President Lagarde seemed to move into damage control mode yesterday after her hawkish comments at last week's central bank meeting spurred the jump in European rates.&nbsp;</span></b><span>Like the Federal Reserve, which did not provide much forward guidance last month outside of signaling a March hike, Lagarde sought to secure the maximum "flexibility and optionality" given the high degree of uncertainty.&nbsp; She pushed back against a claim that it could raise rates before the bond buying was complete.&nbsp; Recall that the BOE made similar claims, but ultimately did not carry them out.&nbsp; Lagarde defended the sequence, which is to conclude the Asset Purchase Program buying shortly before the first hike.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>France reported a record trade deficit in December of 11.3 bln euros.&nbsp;</span></b><span>Exports fell by 0.4% while imports rose 2.5%. Its bilateral trade balance with the US swung into deficit and its shortfall with China swelled by 900 mln euros.&nbsp; France's trade deficit with Germany widened by almost 500 mln euros.&nbsp; France's current account deficit also widened on the back of stepped-up foreign travel.&nbsp; Spain had disappointing news too.&nbsp; Industrial output plummeted 2.6% in December.&nbsp; The median forecast in Bloomberg's survey called for a 0.5% decline.&nbsp; November's 4.5% increase was revised to 3.9%.&nbsp; Italy was the bright spot.&nbsp; Retail sales were expected to have fallen by 0.3% in December.&nbsp; Instead, they rose by 0.9%, the biggest rise since June.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>The euro found a bid after briefly dipping below $1.1400 in the European morning.&nbsp;</span></b><span>&nbsp;There are options struck there for 1.24 bln euros that expire today.&nbsp; Look for the $1.1430-$1.1440 area to offer resistance now, and if that area holds, the euro could work its way toward $1.1350 over the next day or two.&nbsp; &nbsp;<b>Sterling has edged a little higher, but it is running in resistance in the $1.3555-$1.3560 area.&nbsp;</b>&nbsp;It holds the 20-day moving average and options for GBP1.1 bln that expire today.&nbsp; Buying emerged yesterday slightly below $1.35, where options for about GBP435 mln also expire today.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>America</span></b><span><o:p></o:p></span></p><p><b><span>With no Fed speakers planned today, the US economic diary features the December trade balance.&nbsp;</span></b><span>&nbsp;The advance goods balance already showed a record shortfall and this was incorporated into the Q4 GDP estimate.&nbsp; The US external deficit has not become a key focus for the markets, with the Federal Reserve set to stop buying Treasuries next month, the US funding needs would seem to be increasing.&nbsp; We suspect the "twin deficits" return to the fore in in the second half of the year.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>A bipartisan group of 41 Senators is seeking more exemptions from the punitive tariffs on goods from China.</span></b><span>&nbsp; Following the tightening of the rules last October, of the 2200 goods that were initially exempt only 549 were extended.&nbsp; While the administration continues to work on its response to China's failure to meet its commitment under the "Phase 1" trade agreement struck in 2018, there is a pushback.&nbsp;&nbsp;<o:p></o:p></span></p><p><b><span>Canada reports its December merchandise trade figures today, as well.&nbsp;</span></b><span>&nbsp;Canada is enjoying a favorable terms of trade shock.&nbsp; Through November last year, the average monthly trade balance was in surplus of CAD771 mln.&nbsp; In the same period in 2020, the average was a C$3.25 bln shortfall, which was about twice the average in the first 11 months of 2019.&nbsp; The domestic protests against the vaccine mandate have reportedly closed the Ambassador Bridge on Sunday, a key connection between the US and Canada.&nbsp; The protests have shutdown Ottawa, and a state of emergency was declared.&nbsp; &nbsp;The direct market impact appears minor so far.&nbsp; The economic calendars for Mexico and Brazil are light but pick up starting tomorrow.&nbsp;&nbsp;<o:p></o:p></span></p><p> </p><p><b><span>The US dollar has forged a shelf in the CAD1.2650-CAD1.2660 area here in February.&nbsp;</span></b><span>&nbsp;Provided this area holds, the greenback can move to the top of its recent range seen near CAD1.2800.&nbsp; For today, look for resistance in the CAD1.2720-CAD1.2740 area.&nbsp;&nbsp;<b>The greenback's pre-weekend range against the Mexican peso remains operative:&nbsp; ~MXN20.54-MXN20.79.&nbsp;</b>&nbsp;The central bank meeting on Thursday, where most expect a 50 bp hike, may deflect speculative attention away from the peso.&nbsp; The US dollar fell 1.3% against the Brazilian real yesterday, giving back the gains from the previous two sessions.&nbsp; Real money seems attracted to Brazil, which is perceived to be near a peak in rate, and its equity market is weighted toward commodities.&nbsp;&nbsp;<o:p></o:p></span></p><p><br /></p><p><span>Disclaimer</span></p><div>
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