Bonds and Stocks Rally, Leaving Greenback to Meander

<br /> Bonds and Stocks Rally, Leaving Greenback to Meander – Marc to Market<br />


The US dollar entered a consolidative phase yesterday, and this carried into today’s
While the foreign exchange market is sidelined as the two-week trend slows, the stocks and bonds are posting strong gains
today.  Equities are being led by energy and materials, as oil and
industrial metals continue to advance.  Bond are recovering from their
recent slide. 
was the first session since the US election that the euro rose above the
previous day’s highs. 
is doing so again today, but the new highs are
fought hard.  Initial resistance is seen in the $1.0660 area and
then $1.0720.  The euro’s downtrend does not appear over.  One of the
key drivers pushing the euro lower is the widening interest rate differentials
in the dollar’s favor.  The premium the US charges is still rising.
 Today it stands at a new high of 180 bp.  It is up seven basis
points on the week, though the euro is up a little more than half a cent.
 The premium widened by 22 bp last week and nine the week prior.  The 10-year premium is hovering around
3.0%.  Through various business cycles, the US premium rarely been greater
going back to the last 1990s.  
The dollar has
pulled back against the yen after approaching JPY111.40. 
 It is finding support in the JPY110.30-JPY110.50
band.  The US two-year premium is at new highs today near 125 bp.  It
is up a couple of basis points this week after rising eight basis points last
week and 11 the week before.   The 10-year premium rose to 230 bp last week,
its highest in five years and is consolidating a little below there now.  
Similarly, the
US two-year premium over the UK is at 93 bp. 
 It has
not been larger since at least 1992 when
the Bloomberg data starts.  The premium has risen seven basis points so
far this week and 19 the week before.  The prior week the premium rose
five basis points. Sterling could not maintain yesterday’s upside momentum that
faltered just above $1.25 in Asia.  Resistance was pegged near $1.2530.  Support is seen ahead of $1.24 as
the focus shifts to Hammond’s Autumn Statement that is expected to feature some
new infrastructure spending.  
Many investors
anticipate a deal among oil producers and
have rallied oil prices to three-week highs.
 Our concern is that the most vocal
comments suggesting a deal is likely are
coming from OPEC countries like Iran and Iraq that seek an exemption from cuts
or freezes.  Similarly, Russia has expanded its output to post-Soviet
Union highs, seemingly anticipating the possibility of a freeze.  
Moreover, the change ushered in by the US election could, through deregulation
and a stronger driver to make the US even less dependent on foreign energy,
could see America’s output increase more than previously projected.  The
January light sweet oil contract appears
to have traced out a bottoming pattern that projects another run toward $54,
which has stemmed rallies twice earlier this year.  
Base metal
prices are also higher.  
Copper is at its highest
level in over a year.  Zinc and lead are also benefiting from the
anticipation of stronger growth and infrastructure spending.   More
broadly, we note that the CRB Index gapped higher yesterday (and gap take on
added significance as it appears on the weekly bar charts as well).  This follows a gap higher opening last Tuesday,
15 November.   The bullish price action suggests scope for a couple more
percentage points of gains near-term.  
The MSCI-Asia
Pacific Index rose 0.9% in its second days of gains. 
 Led by telecom, energy,
and materials, Japan’s Topix rose 0.3% to extend its winning streak into the
ninth consecutive session. The Dow Jones Stoxx 600 is up 0.5%, with the common
theme being energy and materials.  The reprieve from the bond market
sell-off has seen utilities recover.  
The US reports existing home sales and the Richmond
Fed manufacturing survey.
   Neither are typically market
movers.  Strong housing starts reported last week do not necessarily
translate into existing home sales.  They are expected to be little
changed, but slightly softer, near the best levels since the crisis.  The
US auctions $28 bln of five-year notes today.  Given that policy
expectations are in flux, today’s auction may not go much better than
yesterday’s that saw primary dealers stuck with over 50%.  Tomorrow the
FOMC minutes from the meeting earlier this month will be released.
 Regardless of the election outcome, the minutes will likely reveal that
the Fed was poised to hike rates, with “most participants” seeing a
move shortly.  

Canada reports October retail sales.  If there is a risk, it may lay on the upside of the
median 0.6% forecast after a stronger than expected US report.  The
Canadian dollar is up about 0.8% this week as are the other dollar-bloc
currencies (and Swedish krona and sterling). The oil story appears to be
trumping the rate differential story for
the Canadian dollar.   The US two-year premium over Canada is widening a
couple more basis points today to 42, which is the most since January.
 However, the CAD1.3380 offers support for the US dollar.  Resistance
is seen near CAD1.3450.


Bonds and Stocks Rally, Leaving Greenback to Meander
Bonds and Stocks Rally, Leaving Greenback to Meander

Reviewed by Marc Chandler

November 22, 2016

Rating: 5

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