Dollar, Equities and Yields Fall

<br /> Dollar, Equities and Yields Fall – Marc to Market<br />


In thin holiday markets, a correction to
the trends seen in Q4 has materialized. 
 The US dollar is heavy.  Japanese and European equities are lower.
 Bonds are firmer.  
Some reports
try to link the moves to the unexpected weakness in the US pending home sales,
but this is a stretch and merely seeks to construct a post hoc explanation
for the year-end position adjustments. 
home sales is not a report that moves the market.  The 2.5% decline
in November is the fourth largest decline of the year, and the other three did not seem to spur a market reaction.
 Moreover, the dollar remained firm until after European markets closed
yesterday.  In fact, the euro
reached its low near $1.0370 several hours after the US report.  
US equities
fell yesterday, with the S&P 500 posting its largest decline in a couple of
The Dow Jones Industrials were turned back again ahead of the
psychological 20k level.   Japan, Chinese and Taiwanese equities fell, but
most other markets in Asia rose, and this was sufficient to lift the MSCI
Asia-Pacific Index by a quarter of a percentage point for the second
consecutive session, ending a six-day slide.   Of note, Indonesian
equities have continued to recover.  The markets three-day advance has
lifted the bourse by 5.2%.  Recall foreigners were consistent sellers of Indonesian equities from early November
through the middle of December.   Foreign investors are re-weighting
Indonesian exposure and have been net buyers for a sixth session through
yesterday, and were seen as buyers today, though the final data has not been reported.   
European equity
markets are mixed, but mostly lower, with
the Dow Jones Stoxx 600 off about 0.25%.
  Financials and materials are the
weakest sectors today, while health care, telecoms,
and real estate are posting gains.  Yesterday it closed at its highest
level of the year.  The Stoxx 600 bank index is off 0.8% today.
 Italian bank shares are off around
0.6%, falling for the third session, and likely setting the stage to snap a
four-week 25% rally.  
Bonds are
  Core  European bond yields are off 2-3 bp, though the
10-year UK Gilt yield is off six bp.
  Yields in the periphery of Europe are only slightly softer.  US
10-year yields continue to fall.  Recall the yield peaked in mid-December
near 2.64%.  With today’s four basis point decline, it is at 2.46%, which is
below the 20-day moving average for the first time since November 9, the day
after the US election.  
The news stream
is light. 
 There have been two economic reports
from Europe.  First, EMU money supply increased to a 4.8% pace in November
from 4.4%. Recall M3 growth slowed sharply in October from 5.1% in September.
 The recovery in November underscores
the noisy character of the time series.  Lending ticked up in November.
 Credit extended to non-financial firms rose 1.8% from 1.7%, while lending
to households increased 2.1%, up from
1.9%.  Second, UK house prices measured by Nationwide, rose 0.8% in
December, well above expectations, and sufficient to raise the year-over-year
pace to 4.5%, the same as in December 2015.  
The US reports
the advanced merchandise trade balance for November. 
 The deficit is expected to be little changed from just less than $62 bln.  Wholesale and
retail inventories will also be reported.
 Together, these reports will feed into economists’ forecasts for Q4 GDP.
 It does appear that the composition of growth may have shifted, with a
little less consumption and a little more
investment.   Weekly initial jobless claims are expected to fall but are
skewed by the holidays’ and will likely be largely ignored.  
The euro has recovered
a cent off yesterday’s lows to test yesterday’s high near $1.0480.  
 There is near-term potential for
additional gains.  The $1.0510 area corresponds to a 38.2% retracement of
the euro’s losses since the Fed’s hike.  Above there, we see potential
toward $1.0550-$1.0570.  Initial support is
now pegged near $1.0460.  
The dollar is threatening to fall below its 20-day moving
average against the yen for the first time since the US election. 
 It is found a little below JPY116.20 today, which
also roughly corresponds to the 61.8% retracement of the gains since the Fed
hike.  The yen appears sensitive to the falling equities and Treasury
yields.  It is also a question of positioning.  In the futures
market, speculators have aggressively amassed a large gross short position over
the last few weeks, suggestive of other trend followers and momentum players.
   A break of JPY116.00 could force other late-dollar longs out and
spur a move toward JPY115.25-JPY115.50.  
Sterling is
benefiting from the soft US dollar tone. 
 It had fallen to $1.22 yesterday and
recovered to $1.2270 today.  Coming into
today’s session, sterling has
advanced in only two sessions since December 6.  Today could be the third,
but it needs to close above $1.2225.   This
week’s high was set a little above $1.23.  Last week’s high was a little above $1.25.  
The dollar-bloc
currencies are attracting funds, perhaps as a place to park until liquidity
.  The
Australian dollar has carved out a base near $0.7160.  Initial resistance is seen near $0.7230, and a move above there
could spur a recovery toward $0.7300.  The US dollar reached a nine-month
high against the Canadian dollar yesterday just shy of CAD1.3600.  It has
approached CAD1.35 in the European morning.  Support is seen near CAD1.3475, and a break could see a
move toward CAD1.3360.  
Brent is
extending its advance for a fifth consecutive session, while WTI is lower and
is threatening to end its eight-session march higher.  
 Gold is higher for the fifth session.
 It has not managed to close above its 20-day average since right after
the US election.  That average is a little below $1149 today.  
Lastly, we note
that China has moved to reduce the role of the dollar in its trade-weighted
basket by adding another 11 currencies. 
 The dollar’s weighting will fall to
22.4% from 26.4%  at the start of 2017.   Several new emerging market
currencies will be included such as the South Korean won, the South African
rand, the United Arab Emirates’ dirham,
Saudi Arabia’s riyal, Hungary’s forint,
Poland’s zloty and Turkey’s lira. Although the yuan is at an eight-year
low against the dollar,  it is near a four-month high against the current
CFETS basket.  


Dollar, Equities and Yields Fall
Dollar, Equities and Yields Fall

Reviewed by Marc Chandler

December 29, 2016

Rating: 5

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