Consolidation in Capital Markets

Full liquidity has yet to return from holidays, but after some dramatic
moves yesterday, a consolidative tone is emerging today, despite the slate of
economic data.
  The corrective pressures on the dollar we had been
looking for is most evident against the Australian and Canadian dollars, while
the greenback softer within yesterday’s ranges against the euro, yen, and

Asian equities followed the US lead, where the S&P 500 gains
(~0.85%), was the best in almost a month.
  The MSCI Asia Pacific Index
rose 1.3%, its biggest rise since November 10.  Foreign buying has been noted in South Korea and Thailand. 
The Nikkei advanced 2.5%, perhaps playing a little catch-up after yesterday’s
holiday.  Chinese shares also rose with the Shanghai Composite reaching
three-week highs. 

European equities little changed, with the Dow Jones Stoxx 600 straddling
yesterday’s close.
   Telecoms and financials are leading the
gainers, while consumer-discretionary and
utility sector pace the losers.  Of note, Italian banks shares are
extending their rally into a fourth consecutive session.  Recall that last
week; the FTSE-Italia All-Share Banks
Index fell to snap a four-week 25%+ rally.  It lost 2.8% last week and is
up 5.7% this week.  

Bond markets are mixed.  Core yields are mostly a little firmer,
while peripheral yields are a little softer, with Greek bonds extending the strong rally.   As tensions between the EU
and Greece flared up, the 10-year yield
rose to 7.5% in mid-December.  It finished last year near 7.11% and is now
near 6.73%.    Separately, the US 2-year yield premium over
Germany peaked last week near 2.06% and spent the last four sessions below
2.0%.  It is now poking back above there.  

The economic data has generally
been positive, suggesting that the high income economies finished last year
with some momentum that may carry over into the New Year.
Yesterday’s US manufacturing ISM showed a strong rise in new orders and export
orders (despite the sharp rise in the dollar in Q4).  

Today Japan reported the strongest manufacturing PMI in a year and the eurozone composite  PMI reading of 54.4 in
December is the best in more than five years.
  Manufacturing, as we
saw yesterday, was stronger than the flash estimate, while the slippage in
services was less than estimated.  Also, following on the heels of
yesterday’s robust German and French inflation reports, the eurozone aggregate
measure saw headline CPI rise to 1.1% from 0.6% in November, while the core
rate ticked up to 0.9% from 0.8% (it bottomed near at 0.6%).  

Yesterday’s UK manufacturing PMI was stronger than expected.  It
has been followed by a stronger construction PMI (54.2 from 52.8). 
Separately, the UK reported that mortgage approvals reached an eight-month high
in November.  News that the UK’s envoy to the EU (Ivan Rogers) resigned
(term ends in October) is seen as a loss
of a voice of moderation  He has been critical of the government’s
preparations for Brexit negotiations.  In our read, developments that
favor what has been dubbed a hard Brexit are likely negative for
sterling.  However, the consolidative tone today is prevailing. 
Sterling is practically unchanged against the euro.  The cross appears
stuck in a GBP0.8460-GBP0.8540 range. 

Oil prices staged a sharp reversal yesterday.  March Brent made
new highs above $56 a barrel before turning lower, falling to almost $53. 
The February WTI contract reached almost $55.25 before changing directions and
dropping to almost $52 a barrel.   There did not seem to be much new
behind the move.  The fact that some OPEC members were cutting output
favored prices initially.  Reports today suggest that Russia may wait to
see OPEC’s implementation before beginning its own
cuts.  Prices are stabilizing today, awaiting US inventory news.

In addition to the oil and product inventory estimate from API late in
the session, the US sees December auto sales and the minutes from the FOMC meeting. 

Auto sales are firm, about the 17.8 mln annual unit pace, but there is little momentum of which to speak.  We
suspect the FOMC minutes may be less hawkish that the rate hike and dot plot
would imply.  As we have noted, the average estimate for Fed funds among
the participants did not change as much as the median.  Also, we are
that Yellen acknowledged in her press conference that some but
not all officials adjusted their forecasts for potential changes in fiscal

The euro needs to resurface above $1.0450 to be notableOtherwise, it is in a flat consolidation after
falling to new multiyear lows yesterday.  The low from Asia was $1.0390.
  The dollar is likely to find
support against the yen above yesterday’s low near JPY117.20.  Initial
resistance is now seen near
JPY118.00.  Sterling appears capped below $1.23.  Support is seen near $1.2220.  

The Aussie and Canadian dollar are up a little more than 0.5%
The former is approaching its 20-day moving average near $0.7285.  It has
not closed above that average since December 14.  The $0.7300 corresponds
to a retracement objective of the decline since then.  For its part, the
Canadian dollar is through its 20-day moving average (~CAD1.3380) for the first
time since December 15.   At CAD1.3340 the greenback has retraced 50%
of the gains since December 14 FOMC rate decision day.  The 61.8%
retracement is near CAD1.3280.  


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