Investors Fear Market Meltdown

<div><a href="https://blogger.googleusercontent.com/img/a/AVvXsEiqTbjBNUqRjcfD20LXJMNKYVioiVjxo3PJHiBz521rY2-Sq2H1vVSNLofiLhwZxcgM2uIsTLlIs6TDTnTSA8YimOLpsnfXTxlFt2liLjVkF6OxniNFIUuEI1mCy46NhsURLMsBZK36LwBM1ckORYUezWEjvz09w80WED5qoBhuKBQn82hCpM7vV4q4EA=s183"><img alt="" border="0" data-original-height="183" data-original-width="141" height="400" src="https://blogger.googleusercontent.com/img/a/AVvXsEiqTbjBNUqRjcfD20LXJMNKYVioiVjxo3PJHiBz521rY2-Sq2H1vVSNLofiLhwZxcgM2uIsTLlIs6TDTnTSA8YimOLpsnfXTxlFt2liLjVkF6OxniNFIUuEI1mCy46NhsURLMsBZK36LwBM1ckORYUezWEjvz09w80WED5qoBhuKBQn82hCpM7vV4q4EA=s400" /></a></div><p><b><span>Overview:</span></b><span>&nbsp; The stunning upside reversal in US stocks was not sustained.&nbsp; The NASDAQ futures are off around 1.7% and the S&amp;P 500 futures are nearly 1.2% lower.&nbsp; Asian equities were hit hard, with China, Korea, and Australia off more than 2%.&nbsp; Singapore unexpectedly tightened monetary policy (through the exchange rate) and the local stocks were off 1.3%.&nbsp; Europe's Stoxx 600 is up about 0.7%, led by energy and financials.&nbsp; &nbsp; Bond markets are drawing little support.&nbsp; The US 10-year yield is up to almost 1.79% after testing 1.70% yesterday. European yields are mostly 2-4 bp higher, and the periphery is holding in better than the core.&nbsp; The dollar is firm, though the Australian and Canadian dollars are the most resilient.&nbsp; Among emerging market currencies, the Russian rouble is a little higher after the central bank indicated yesterday it would hold off its forex operations tied to managing its oil proceeds that involves buying foreign currencies.&nbsp; The Singapore dollar has also edged higher.&nbsp; The Chinese yuan ticked up even though bonds and stocks weakened.&nbsp; The JP Morgan Emerging Market Currency Index is off for the third day, the longest losing streak this year.&nbsp; Gold is slipping lower in the European morning.&nbsp; March WTI is trading firmly and is around $84 after falling more than 2% yesterday.&nbsp; US natural gas is off around 2.4% after rallying almost 6% in the past two sessions.&nbsp; European natgas is slightly lower, and is consolidating near the three-day 25% surge.&nbsp; Iron ore has fully recouped yesterday's 3% decline and copper has steadied after falling almost 4% in the past two sessions.&nbsp;&nbsp;</span></p> <p><b><span>Asia Pacific</span></b><span><o:p></o:p></span></p> <p><b><span>Australia's Q4 CPI was higher than expected.&nbsp;&nbsp;</span></b><span>The key take away is to boost the market's confidence that the central bank will have to capitulate and raise rates considerably earlier than it has indicated.&nbsp; The Reserve Bank of Australia meets early next week.&nbsp; The market has moved to discount a greater likelihood of a June move.&nbsp; The quarterly pace of inflation rose to 1.3% from 0.8% and lifted the year-over-year rate to 2.6% from 2.1%.&nbsp; The median forecast (Bloomberg survey) was for a 2.3% annual pace.&nbsp; The underlying measures also rose more than expected.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The Monetary Authority of Singapore, which uses the exchange rate as its main monetary policy tool, unexpected (between meetings) raised the path slightly of the Singapore dollar.</span></b><span>&nbsp; The currency adjustment was in response to the one percentage point increase in its headline and core CPI projections.&nbsp; This is seen as a preemptive move, consistent with its move last October.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>South Korea's growth accelerated to 1.1% in Q4 from 0.3% in Q3.</span></b><span>&nbsp; It was boosted by both exports and consumption (shades of "dual circulation?).&nbsp; The year-over-year pace edged up to 4.1% from 4.0%.&nbsp; The central bank hiked its policy rate 25 bp last month to 1.25%.&nbsp; It hiked twice last year, and the swaps market has 75 bp of tightening discounted this year.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The dollar tested the JPY113.50 area yesterday and recovered to JPY114.00.&nbsp;</span></b><span>&nbsp;It is probing session highs in the European morning near JPY114.10.&nbsp; There is a $410 mln option at JPY114.35 that expires today.&nbsp; Some position adjustments ahead of tomorrow's FOMC meeting may be helping the greenback, but the intraday momentum is getting stretched.&nbsp;&nbsp;<b>The Australian dollar is in the middle of its roughly $0.71-$0.72 range traveled yesterday.&nbsp;</b>&nbsp;The $0.7185-$0.7200 area offers the nearby cap.&nbsp; Here too the intraday momentum indicators caution against chasing the market higher now.&nbsp;<b>&nbsp;Even without a bid from its asset markets, the Chinese yuan edged higher.&nbsp;</b>&nbsp;It is the fifth consecutive advance.&nbsp; To put the yuan’s move this year in perspective, consider it has only fallen against the dollar in four sessions so far.&nbsp; Against its trade-weighted basket, the yuan appears to be at a record high.&nbsp; The PBOC set the dollar's reference rate at CNY6.3418, a little firmer than the market expected (Bloomberg median projection) of CNY6.3410.&nbsp; Although some are drawing strategic conclusions about PBOC policy, we think a clear picture will emerge after the weeklong Lunar New Year holiday that begins next Monday.&nbsp;<o:p></o:p></span></p> <p><b><span>Europe</span></b><span><o:p></o:p></span></p> <p><b><span>On the heels of yesterday's better than expected German flash PMI, the IFO survey was reported today.&nbsp;&nbsp;</span></b><span>The overall assessment of the business climate improved more than anticipated to 95.7 from 94.8. This snapped a six-month decline.&nbsp; The improvement comes as the number of Covid cases surged.&nbsp; The view of current conditions deteriorated to 96.1 from 96.9.&nbsp; It is the fifth consecutive fall.&nbsp; The improvement came from expectations, perhaps on ideas that things can't get worse.&nbsp; The expectations component rose to 95.2 from 92.7.&nbsp; It is the first increase since last June.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>Even before Gray's report on the internal investigation of "partygate" at 10 Downing Street, new reports add pressure to Prime Minister Johnson.</span></b><span>&nbsp; ITV News reported on Johnson's birthday party in mid-2020 during the pandemic restrictions that included at least 30 staff.&nbsp; The report plays into the general sense of the Prime Minister who is a character that is well known.&nbsp; Gray's report was expected to hold off a formal police investigation, but the London police have announced it has opened a probe.&nbsp; Not helping matters, separately, a UK Treasury and Cabinet Office minister (Agnew) resigned ostensibly over the government's record in dealing with fraudulent claims on its Covid business loan program.&nbsp;&nbsp;</span></p><p><b><span>The US and NATO are shoring up their defenses in Eastern and Central Asia</span></b><span>.&nbsp; This seems similar to Sweden's recent decision to send troops to the island it controls in the Baltic Sea.&nbsp; The moves seem defensive in nature.&nbsp; These, like the threats of financial and economic sanctions are well within the playbook that Russia would have anticipated.&nbsp; Therefore, while prudent and cautionary, the military moves are unlikely to offer a powerful deterrent.&nbsp; Meanwhile, the UK defense minister warned that Russian advance troops are already operating in Ukraine.&nbsp;&nbsp;</span></p> <p><b><span>Hungary is expected to hike its base rate by 30 bp today to 2.70%.&nbsp;</span></b><span>&nbsp;It would be the eighth hike in as many months, December CPI reported earlier this month rose 7.4% year-over-year (steady from November).&nbsp; This will set the stage for another hike in the one-week deposit rate on Thursday. The deposit rate had been raised consistently from mid-November (1.80%) to 4% at the end of last year.&nbsp;<o:p></o:p></span></p> <p><b><span>The euro dipped below $1.13 yesterday but recovered to $1.1335.</span></b><span>&nbsp; It was unable to extend the recovery and new sellers emerged.&nbsp; The lows are being recorded in the European morning near $1.1280.&nbsp; &nbsp;Even though the intraday momentum indicator is overextended, it may be difficult for the euro to resurface above the $1.1300 level quickly as a 1.3 bln euro option expires there today.&nbsp; This month's low is near $1.1270.&nbsp;<b>Sterling, which we identified as&nbsp;<a href="http://www.marctomarket.com/2022/01/a-couple-of-false-breaks-and-new-four.html" target="_blank">particularly vulnerable</a>&nbsp;in our weekly review of the price action slid almost 0.5% yesterday, its biggest loss this month</b>.&nbsp; It has been unable to overcome resistance at $1.35 (a GBP430 mln expiring option is also struck there) and looks poised to return to yesterday's low near $1.3440.&nbsp; A&nbsp;break could signal a test on $1.3400.&nbsp;<o:p></o:p></span></p> <p><b><span>America</span></b><span><o:p></o:p></span></p> <p><b><span>US house prices, the Conference Board's consumer confidence, and the Richmond Fed's manufacturing survey are not the data points that typically move the market.&nbsp;&nbsp;</span></b><span>This seems doubly true given the stock market's swoon, the conclusion of the FOMC meeting tomorrow, and the geopolitical strains in Europe.&nbsp; The market has not been dissuaded from expectations of a March rate hike but has reined in thoughts it could be a 50 bp move.&nbsp; Also, the market has trimmed its aggressiveness about more than four hikes this year, even though one large bank suggested a hike at every meeting starting in March was possible.&nbsp; A week ago, the market was discounting about a one-in-five chance of a fifth hike.&nbsp; Now a little less than four hikes are fully discounted in Fed Funds futures strip.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The market has also pulled back a bit from its expectation of a hike tomorrow by the Bank of Canada. A week ago, the swaps markets had discounted an almost 83% chance of a hike.&nbsp;</span></b><span>&nbsp;Now, a little less than 2/3 chance is priced in.&nbsp; Bloomberg's survey of economists seemed broadly split.&nbsp; The median is for an unchanged stance, but the average is 36 bp, reflecting the close decision.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>Mexico's biweekly CPI was slightly firmer than expected yesterday, and the year-over-year rate slipped to 7.13% from 7.26%.</span></b><span>&nbsp; Today, Mexico reports November economic activity index, which is not a market-mover.&nbsp; The central bank does not meet until February 10, and it will do so with a new governor at the helm.&nbsp; The swaps market has about 200 bp of tightening this year discounted.&nbsp; It is leaning to a 35 bp hike after a 50 bp move at the end of last year.&nbsp;&nbsp;<o:p></o:p></span></p> <p><b><span>The Canadian dollar suffered in yesterday's risk-off environment, and the greenback surged to CAD1.27 before pulling back along with the equity recovery to settle near CAD1.2640.&nbsp;</span></b><span>&nbsp;It is little changed in a tight range 20-pips or so on either side of the close.&nbsp; An option expiring today for about $4235 mln at CAD1.2685 was likely neutralized yesterday.&nbsp; The market may take its cues from equities.&nbsp;&nbsp;<b>The greenback rose to MXN20.67 yesterday and is near there are the North American market prepares to open.&nbsp;</b>&nbsp;The year's high was set on January 6 close to MXN20.76.&nbsp; Above there, the initial risk is toward MXN20.82.&nbsp;&nbsp;<o:p></o:p></span></p><p><br /></p><p><br /></p><p><span>Disclaimer</span></p><p><br /></p><div>
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