Euro Continues to Push Higher

The euro is edging higher to trade at its best levels since the
middle of last month.
It is drawing closer to the $1.1880 area, which if overcome, could point to return to the year’s high seen in early
September near $1.2100.  
There is a combination of factors lifting the euro.  The recent data, including
yesterday’s flash PMI, suggests that the
regional economy is re-accelerating here in Q4.  Today’s German IFO survey
provides corroboration.  The assessment of the overall business climate
rose to a new record high of 117.5 from an upwardly revised 116.8.  The
breakdown showed that even though the assessment of the current economy eased a
touch, the improved expectations more than offset it.  
One of the reasons that the
current assessments may have softened is the political uncertainty since the
elections two months ago that saw both of the main two parties draw the least
voter support in modern times.
  While the attempt to forge a complicated coalition between
the center-right CDU/CSU, the liberal (meaning pro-market) Free Democrats, and the Greens faltered, the Social
Democrats are rising to the occasion and are now open to talks.  
The SPD has been the junior
member of two of three governments headed by Merkel.  
They appear to have lost their identity,
and after the disastrous election results were going back into
opposition.  There was an additional wrinkle.  The AfD emerged as the
third largest party.  If the SPD join the government, the AfD would be the
main opposition party, for which there are special parliamentary
privileges.  Being in opposition allows those privileges to bestowed on
the SPD.  
The other wrinkle is the SPD leader Schulz is under pressure within his
party to step down and make room for the next generation.
  The SPD holds a special party
conference on December 7-9 and leadership contest. 
The backing up of US 10-year Treasury yields appear to be
lending support to the greenback against the yen.
  The dollar had slipped to almost
JPY111.00 yesterday.   The US 10-year yield is up nearly three basis
points today (to almost 2.35%), and this
has coincided with dollar upticks toward the lower end of the previous band of
support (JPY111.65-JPY111.80).  
The Bank of Japan reduced the number of long bonds (25 years-plus) it is purchasing by
JPY10 bln to JPY90 bln.
It is the first reduction since March.  The unexpected move weighed on
JGBs.  There had been talking among
primary dealers in Japan that the government was considering reducing issuance
of bonds will very long maturities (40 years) in the next fiscal year, and this
had resulted in what some thought was an
undesirable flattening of the curve.  Separately, we note that last week
was the first in four weeks that the Ministry of Finance data showed Japanese
investors turned net buyers into foreign
Chinese stocks stabilized
after yesterday’s sharp fall, and the
Shanghai Composite and the CSI 300 posted fractional gains. 
 Yesterday’s rout did not rattle
global investors, but the steadier note
today is seen as a constructive development.  The MSCI Asia Pacific Index rose
for the fourth session and finished the week with a nearly 1.6% rise.  In
so doing, it recouped fully last week’s loss.  The benchmark has posted
only three weekly losses since the first week of July.     
Chinese officials surprised
investors by announcing a cut in the
tariff (tax on imports) for a wide range of consumer goods.
  The average tariff was cut from 17.3% to 7.7% effective December
1.  While may read this as an attempt to placate the US, the bilateral
trade balance (China runs ~$370 bln surplus) 
is unlikely to be impacted very much. US exports, which are near record levels,
tend not to be consumer goods, but semi-finished goods and capital
Sterling continues to knock
on the ceiling that has capped it since the beginning of October
convincing break targets $1.3420.   It seems to be more a
reflection of dollar weakness than sterling strength.  Sterling is
slipping easing against the euro for the fourth consecutive session. 
 Still, since the middle of September, sterling has been alternating
between weekly gains and losses against the euro.  
The UK appears to have made
progress on two of the three issues that the EC is demanding.
  A resolution of EU citizens’ rights
post-Brexit appears near, and the UK appears willing to improve its initial
financial offer.  The Irish border remains an important sticking
point.  The UK is testing the waters to push off the issue until later by
granting Ireland a “process veto.”  This would allow Ireland the right to veto the Brexit agreement at
another stage and grants that “nothing is agreed until everything is
The EC appears to see this
as promising, but not apparently not sufficient.
 It is afraid the UK will later try
to use it as a negotiating chit, and the
EC apparently does not want to surrender so much to Ireland.   Note
too that the Irish government (a minority government) is having its own challenges.  Fianna Fail, the main opposition party,
withdrew its support for Deputy PM
Fitzgerald over that her actions in the previous government over the police
scandal.  It is a delicate balancing act for Prime Minister Varadkar and a
wrong turn, could see his government collapse.  

The North American session
features the Markit’s preliminary PMI readings for the US.
  While there may be some headline
risk, the economy appears to be tracking its third consecutive quarter of 3%+
annualized growth.  While there is concern that an inverted yield curve
portends a recession, the fact of the matter is the curve (2-10 yr) is flat but
not inverted.  And even there, flattening has stabilized in recent
sessions just below 60 bp.  

The probe into
Russia’s attempt to influence last year’s US election took another turn with
reports suggesting former national security adviser Flynn has stopped talking
to the White House, which perhaps signals his cooperation with the special investigation,
led by Mueller.
 Meanwhile, the Senate appears to be set to hold a floor vote on the tax
reform bill next week. 


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