The most important development today has been
the stability in the equity markets after last week’s meltdown. The
recovery from new lows in the US before the weekend set the tone for today’s
moves.
Tokyo markets were on holiday, and the MSCI
Asia Pacific Index excluding Japan snapped a seven-day slide with a nearly 0.6%
gain. China’s markets led the rally with the CSI 300 gaining
1.3%. There were reports suggesting that some Chinese officials offered
informal direction to shareholders to support the market. Separately, the
PBOC set the reference rate of the yuan stronger, but the market drove the yuan
lower, finishing about 0.5% lower against the dollar.
China also reported strong growth in M1 and M2
money supply, while a surge in new yuan loans (CNY2.9 trillion) accounted for
the bulk of the aggregate financing (CNY3.06 trillion). New yuan
lending typically rises strongly in January as unpaid loans and interest are
often rolled into new and higher loan balances.
The Dow Jones Stoxx 600 in Europe is up more
than 1.6% near midday on the Continent. Materials and information
technology are the strongest sectors, but all the main industry groups are
participating. If gains can be retained, it would be only the second
advancing sessions since January 26. The S&P 500 is currently trading a
little more than 1% stronger.
Looking at 10-year benchmark yields, Australia
and New Zealand are three-five basis points higher, as are core bond yields in
Europe and the US. Peripheral European bond yields are softer with
Italy and Spain off a little more than one basis point, while Portugal is
nearly three basis points lower.
The US dollar is sporting a softer profile
against most of the major currencies. The Swedish krona and New
Zealand dollar are challenging the generalization. There is little
enthusiasm and the market feels tentative. The euro backed off the
initial test on $1.2300, but the market does not appear to have given up on it,
and appears to be nibbling at the pullback below $.12260. The dollar has
been kept in a half a yen range below JPY109. Between JPY108.75 and
JPY109.00, there are about $1.1 bln in options struck that expire today.
Higher core yields and firmer equities would give one a bias to expect a weaker
yen, but it has not materialized yet.
Sterling has held above $.13800 but saw
sellers in early Europe cap it near $1.3875. The cross is in a tight
range, and the euro continues to probe resistance in the lower part of the
GBP0.8880-GBP0.8900 band. The Australian dollar and Canadian dollars are
firm, extending the pre-weekend advance in a limited fashion.
There is a light economic schedule
today. The main event will be the formal unveiling of the Trump
Administration’s infrastructure initiative. The leaked details suggest
there may be less to it than meets the $1.5 trillion headline. Although
the recent tax cuts mean that state and local taxes are not as deductible from
federal taxes as previously, the infrastructure initiative will be laid largely
at their door. The federal government will limit its contribution to $200
bln, and it appears that bulk of this will be funds that are already earmarked
for transportation investment, and other programs, like loan extensions, and
refurbishing federal buildings.
Nevertheless, the idea of an infrastructure
initiative that is following tax cuts and a lifting of spending caps, is making
for optics suggesting fiscal policy is out of control. Preferably,
the fiscal position improves during the expansion part of the cycle, but in the
US, the deficit is swelling in cyclically adjusted terms, and this can become
more worrisome, and the pipers are more likely to be paid, not so much during
expansion, but when the business cycle ends.