Equities and Oil Stabilize

Global equities are stabilizing today after the recent downside
The MSCI Asia Pacific Index snapped an eight-day slump with a
0.4% gain, led by a rebound in Tokyo and India.   European markets
are firm, with the Dow Jones Stoxx 600 up around 0.25% near midday in
London.  All sectors are higher but telecom and real estate are performing
best, while energy and health care are laggards.  

The S&P 500 will likely trade higher, at least in early
There was intraday penetration of the 2628 support area we
noted, but the index closed back above it. If the recent swoon was spurred by
concern that the Alternative Minimum Tax had been retained in the Senate tax
reform, then some investors may be more relaxed as several leading Senators,
including Hatch, have indicated that it will be dropped in the final

The Senate and House have now named the members of the reconciliation
  While they sort it out, the focus shifts to the spending
authorization, which if not renewed, will lead to a government shutdown on
Saturday.  The House may vote on a measure today to extend the spending authorization
until December 22.  The Senate may vote on the short-term extension

The narrow Republican majority in the Senate may get even smaller if they
do not hold on to the seat in Alabama, which will hold its special
election on December 12.
  Consider that the Senate tax bill passed
with a one vote majority.  The deal that Collins struck over health care
reform apparently is not supported by House Speaker Ryan.  If she were to
vote against the final bill and the GOP loses the Alabama seat, it could
jeopardize the tax changes.  Separately, Democrat Senator Franken is
expected to resign today.  The Democratic governor would like ensure the
seat stays in the Democrat hands.  

Meanwhile, investors await new proposals by UK Prime Minister May. 
The worst suspicions were confirmed by top government officials. Chancellor of
the Exchequer Hammond acknowledged that there has not been a formal discussion
by the cabinet of what kind of post-Brexit trade relationship the UK
wants.  And not to be outdone, Brexit Secretary Davis revealed that there have
not been quantitative studies of the impact of Brexit (only qualitative,
whatever that really means), and no industry-level study.   

Nine-months after triggering Article 50, the UK still sees to be without
a rudder.
  It has belated made some progress on its financial
commitment, but has made little headway apparently on the rights of EU citizens
post-Brexit and the Irish border.  And if the first stage of negotiations
has been difficult, to say the least, the second stage is unlikely to be much
better.  UK officials appear not to have given it the level of thought and
analysis that even the most adamant Leaver would have rightfully
expected.  The EU seems to want offer the UK and trade agreement like the
one struck recently with Canada.  The UK, of course, will want more, even
if it does not know it yet.  

There are three economic data points to note.  First, Australia
reported a much smaller than expected trade surplus, which followed the softer
Q3 GDP figures that were released yesterday.  The October trade surplus
was A$105 mln.  Economists expected surplus ten-times larger. 
Imports rose 2% and exports fell 3% on the month.  Iron ore exports fell
10% and coal exports were off 3%.   

The Australian dollar was punished on the news and it is trading at its
lowest level in about six months as it approaches $0.7500.
Tuesday, after strong retail sale, the Aussie ran into a wall of selling near
the $0.7655 resistance.  

Second, China’s reserve rose for the 10th consecutive month. 
The $10 bln increase was a bit smaller than expected.  Given its continued
preference for Treasuries, an increase in China’s reserves often means an
increase in its demand for US securities.  This may not be the case with increase
in November reserves.  Given the developments in the foreign exchange and
bond market, the increase in reserves is likely a function of valuation
adjustment rather than new inflows.  

Separately, we note that China’s Sinopec is suing Venezuela’s PDVSA to
recover unpaid bills.
  What is interesting is that the case will be
heard in US courts.  This follows China’s previous decision to offer
dollar-denominated bonds.  These developments should give pause to those
who think that China can replace the US on the global stage or that the yuan is
going to replace the dollar as the main reserve assets in any kind of
meaningful timeframe. 

Third, German industrial production unexpected fell for the second
consecutive month.
  Economists had been looking for a rebound after a
1.6% decline in October.  October was revised to -0.9%, but the November
reading showed a 1.4% decline.  It appears that there were some
distortions caused by holidays and bridge vacations.  Manufacturing output
fell 2% led by investment and consumer goods.  Energy output jumped

After a slow start and narrow ranges in Asia, Europe is pressing the euro
  It is the fifth consecutive day of lower lows and the fourth
session of lower highs.  Since violating the November uptrend earlier in
the week, the euro has pushed lower.  The next immediate target is near
$1.1760 and then $1.1710.  There are two large option strikes that expire
today.  One is at $1.1750 (~975 mln euros) and $1.1810 (1.1 bln

The dollar held JPY112.00 yesterday and has traded firmer today. 
At JPY112.65, it is near the middle of this week’s range.  Sterling is
flat, within yesterday’s ranges.  A bounce in late morning trading appears
to be more order-driven than data-inspired, and the gains were quickly
unwound.   The Canadian dollar retain the soft tone seen yesterday
after the Bank of Canada meeting, which we did not see as providing fresh

Some suggested that the rally in the BA futures was a sign that the
market was moving away from a January hike.
  Color us skeptical. 
We do not think the market was expected a January hike even before the BOC
meeting.  And the BA futures are not a particularly useful guide, and the
cleaner read, the Overnight Index Swaps showed a somewhat greater chance at 23%
vs. 16% previously.  We do not expect a hike until closer to the middle of
2018.   The US dollar had frayed the lower end of its recent range
(~CAD1.2660) earlier in the week and now it’s moving above CAD1.2800.  The
upper end of the range is seen near CAD1.2900-CAD1.2920. 

Lastly, we note that oil prices are stabilizing after yesterday’s nearly 3.0% decline.  US oil inventories fell, but gasoline inventories rose more than expected.  It suggests that the oil surplus is shifting to a gasoline surplus and this may signal lower refinery demand going forward.  Refiners have boosted their operating rates for seven weeks.  WTI for January delivery reached nearly $59 toward the end of last week and is now poking back above $56. 


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