HK Rallies and PBOC Cuts, US Stocks Stabilize

<div><a href="https://blogger.googleusercontent.com/img/a/AVvXsEiJYsOrBVUzJC1ei7okKCFzf-m-2LWvUU09XJo3bJIgQCH3–S9VAeSyjk0lJjSGwh5FgTQE6l1ORJlWilfKo_16LpxsMJPMqa-zzol0bGkBDh43xkstiKMeb905d2doh9fRhTB4sNobLK7yq1AZAnF8h3FeSfB_uYuCxUHfK59HjlfKIMU4TQOPOTQNg=s1324"><img alt="" border="0" data-original-height="1324" data-original-width="1200" height="400" src="https://blogger.googleusercontent.com/img/a/AVvXsEiJYsOrBVUzJC1ei7okKCFzf-m-2LWvUU09XJo3bJIgQCH3–S9VAeSyjk0lJjSGwh5FgTQE6l1ORJlWilfKo_16LpxsMJPMqa-zzol0bGkBDh43xkstiKMeb905d2doh9fRhTB4sNobLK7yq1AZAnF8h3FeSfB_uYuCxUHfK59HjlfKIMU4TQOPOTQNg=s400" /></a></div><p><b><span>Overview:&nbsp;&nbsp;</span></b><span>Amid inflation fears and the decline in crypto prices, gold was resurrected, rallying the most in three months yesterday to its best level since November.&nbsp; It is consolidating those gains today, straddling the $1840 level.&nbsp; Equities are trying to stabilize.&nbsp; The MSCI Asia Pacific Index snapped a five-day slide with a 1% gain helped by a 3.4% rally in Hong Kong .&nbsp; The Hang Seng was lifted by the mainland's initiatives, which included a small reduction in the loan prime rate and promises of stepped-up support for the property sector.&nbsp; China's CSI 300 rose almost 1%, its third gain this week.&nbsp; A rebound in the tech sector also helped lift the Nikkei by 1.1%.&nbsp; &nbsp;European shares opened higher, but the lack of breadth saw the Stoxx 600 turn lower.&nbsp; Gains in utilities and communications&nbsp;</span><span>are not to offset the losses elsewhere, led by energy and financials.&nbsp; US futures are firm after closing poorly yesterday.&nbsp; Benchmark 10-year yields are softer.&nbsp; &nbsp;The US 10-year is off three basis points to near 1.83%.&nbsp; European yields are 1-3 bp lower.&nbsp; &nbsp;The US dollar is trading off against most of the major currencies.&nbsp; The Norwegian krone, where the central bank stood pat, and the Swedish krona are laggards today. A strong employment report is helping lift the Australian dollar by around 0.4% to lead the pack.&nbsp; Emerging market currencies are mixed, with Russia, Hungary, and Turkey leading the decliners.&nbsp; The Thai baht and South African rand are the best performers, but the JP Morgan Emerging Market Currency Index is slightly weaker today after posting its best gain in a month yesterday (~0.75%).&nbsp; Industrial metals are firmer.&nbsp; Tin and nickel shortages are behind their surge, while iron ore prices are up 2%+ for the third consecutive session and at their best level since last August.&nbsp; Copper prices are extending yesterday's 2% rally.&nbsp; Crude is consolidating a three-day rally that lifted March WTI to almost $86.80.&nbsp; US natgas tumbled almost 5.9% yesterday and is straddling the $4 level today.&nbsp; &nbsp;The Dutch benchmark is paring initial follow-through after dropping 8.3% yesterday.&nbsp;&nbsp;</span></p> <p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p> <p><b><span>China's loan prime rate was cut.&nbsp;&nbsp;</span></b><span>The one-year rate was cut by 5 bp in December and 10 bp earlier today to stand at 3.7%.&nbsp; The five-year loan prime rate was cut by only five basis points (to 4.6%).&nbsp; This was less than expected and is seen as a cautionary signal about the property market.&nbsp; Still, policymakers are seen taking other efforts to promote stronger growth more broadly.&nbsp; Further easing by the PBOC is expected.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>Japan reported a smaller than expected December trade deficit.&nbsp;</span></b><span>&nbsp;Exports did not pullback as much as expected.&nbsp; After rising 20.5% year-over-year in November, they slowed to a 17.5% gain in December.&nbsp; Imports slowed more than expected, to 41.1% from 43.8%.&nbsp; This is broadly consistent with the seasonal pattern that December often sees improvement from November.&nbsp; Last year, Japan reported an average monthly trade deficit of JPY122.7 bln.&nbsp; In 2020, the average monthly trade surplus was JPY32 bln. An average trade shortfall of almost JPY140 bln was recorded in 2019.&nbsp; Yet, through this period, Japan continued to experience a current account surplus, driven not by trade in goods and services, but by the return on foreign investment.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>Despite new social restrictions, Australia's December jobs data was better than expected.&nbsp;</span></b><span>&nbsp;Overall job growth was near 65k (Bloomberg median was for an increase of 60k), and the unemployment rate tumbled to 4.2% from 4.6% (4.5% anticipated).&nbsp; Three-quarters of the jobs were full-time positions, and the participation rate was steady at 66.1%.&nbsp; The swaps market has about 40 bp of tightening priced in over the next six months.&nbsp; The central bank has pushed against such expectations.&nbsp; &nbsp;It meets again on January 31.<o:p></o:p></span></p> <p><b><span>The US dollar recorded a new low for the week near JPY114.00, where a $520 mln option expires today.&nbsp;</span></b><span>&nbsp;It has not been able to rise much about JPY114.50.&nbsp; &nbsp; We suspect the North American market can probe the upside.&nbsp; A close above JPY114.60 would help stabilize the tone.&nbsp;&nbsp;<b>The Australian dollar is firm after the employment data pushed it to new highs for the week just shy of $0.7260.&nbsp;</b>&nbsp;The market does not seem to have the energy to test the $0.7290-$0.7300 area, where options for around A$660 mln lay.&nbsp;<b>The dollar spent the entire mainland session below CNY6.35.&nbsp;</b>&nbsp;The PBOC set the dollar's reference rate at CNY6.3485, the strongest in three years, and stronger than the Bloomberg survey projected (~CNY6.3478).&nbsp; Still, state-owned banks (aren't they all?) were seen on the dollar's bid when it approached CNY6.3400.&nbsp;<o:p></o:p></span></p> <p><b><span>Europe</span></b><span><o:p></o:p></span></p> <p><b><span>The economic news stream is light.&nbsp;&nbsp;</span></b><span>The ECB's record of last month's meeting will be published shortly, but it tends not to be a market mover.&nbsp; &nbsp;The December CPI was revised to show a 5.0% year-over-year increase rather than 4.9%, while the monthly increase remained at 0.4% and the core rate was steady at 2.6%.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The US and Europe agree that a Russian invasion of Ukraine needs to be resisted, but there is still differences on the response.&nbsp;</span></b><span>&nbsp;Biden raised the prospect yesterday of something short of a full invasion, which he acknowledged would complicate the response. Russia has continued to reinforce its troops and artillery.&nbsp; US Secretary of State Blinken and Russia's Foreign Minister Lavrov are to talk tomorrow.&nbsp; Russia continues to deny plans to invade but demands concessions from NATO that will not be forthcoming.&nbsp; This hangs over the markets like the sword of Damocles.&nbsp;<o:p></o:p></span></p> <p><b><span>Norway's Norges Bank kept rates on hold today, but reaffirmed a hike in March, which would be the first meeting with a new governor, who has yet to be named.</span></b><span>&nbsp; The swaps market sees 85 bp of tightening this year.&nbsp; Last year, it hiked rates in September and December.&nbsp; &nbsp;Elsewhere, we note that as widely expected Turkey's central bank left the one-week repo rate unchanged at 14.00%, lending credence to ideas that the easing operations are complete after 500 bp in cuts were delivered in the last four months of 2021.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The euro is trading quietly in less than a 30-pip range below $1.1370.</span></b><span>&nbsp;The $1.1380 area is the (38.2%) retracement objective of the decline from last Friday's high near $1.1485.&nbsp; A break of $1.1340 could see $1.1320 but a close below $1.1300 is needed to lend credence to ideas that a high is in place.&nbsp; There is a large option (nearly 1.1 bln euros) at $1.1350 that expires today.&nbsp;&nbsp;<b>Sterling is coiling.&nbsp;</b>&nbsp;It is inside yesterday's range, which was inside Tuesday's range (~$1.3575-$1.3660).&nbsp; The consolidative tone may persist today ahead of tomorrow's retail sales, where there could be room for disappointment after a 1.4% gain in November.&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 US reports weekly initial jobless claims, the Philadelphia Fed survey, and existing home sales.&nbsp; &nbsp;</span></b><span>The high frequency data points may pose some headline risk, but the market is focused on policy ahead of next week's FOMC meeting.&nbsp; That said, the Empire State manufacturing survey, reported earlier this week, was a disappointment, while yesterday's housing starts, and permits were stronger than anticipated.<o:p></o:p></span></p> <p><b><span>Canada's December headline CPI yesterday was in line with expectations (4.8% vs. 4.7% in November), but the underlying core measures were firmer.&nbsp;&nbsp;</span></b><span>The Bank of Canada meets next week, and the swaps market has a little more than a 2/3 chance of a hike.&nbsp; Tomorrow, Canada reports November retail sales, which are expected to be robust (1%+). Mexico reports its December unemployment, which is expected to have drifted lower.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The greenback is chopping roughly between CAD1.2450 and CAD1.2550 for the sixth session.</span></b><span>&nbsp; &nbsp;This consolidation phase follows the US dollar's decline from last year's high on December 20 near CAD1.2965.&nbsp; Without re-kindling the downside momentum, the greenback may be set up for a bounce.&nbsp; The Slow Stochastic is turning up.&nbsp; The CAD1.26 area is technically important.&nbsp; It is the neckline of a head and shoulders pattern.&nbsp;&nbsp;<b>The dollar's downside momentum faded against the Mexican peso.&nbsp;&nbsp;</b>Despite repeated attempts, it could not punch below the 200-day moving average (~MXN20.2850) and bounced yesterday to close above MXN20.50 for the first time since January 5.&nbsp; It is in a narrow range straddling MXN20.50 today. The intraday technicals caution against chasing the dollar higher.&nbsp; A pullback toward MXN20.40-MXN20.45 looks reasonable.&nbsp;</span>&nbsp;</p><p><b><br /></b></p><p><b><br /></b></p><p><span>Disclaimer</span></p><div>
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