HK Rallies and PBOC Cuts, US Stocks Stabilize

Overview:  Amid inflation fears and the decline in crypto prices, gold was resurrected, rallying the most in three months yesterday to its best level since November.  It is consolidating those gains today, straddling the $1840 level.  Equities are trying to stabilize.  The MSCI Asia Pacific Index snapped a five-day slide with a 1% gain helped by a 3.4% rally in Hong Kong .  The Hang Seng was lifted by the mainland’s initiatives, which included a small reduction in the loan prime rate and promises of stepped-up support for the property sector.  China’s CSI 300 rose almost 1%, its third gain this week.  A rebound in the tech sector also helped lift the Nikkei by 1.1%.   European shares opened higher, but the lack of breadth saw the Stoxx 600 turn lower.  Gains in utilities and communications are not to offset the losses elsewhere, led by energy and financials.  US futures are firm after closing poorly yesterday.  Benchmark 10-year yields are softer.   The US 10-year is off three basis points to near 1.83%.  European yields are 1-3 bp lower.   The US dollar is trading off against most of the major currencies.  The Norwegian krone, where the central bank stood pat, and the Swedish krona are laggards today. A strong employment report is helping lift the Australian dollar by around 0.4% to lead the pack.  Emerging market currencies are mixed, with Russia, Hungary, and Turkey leading the decliners.  The Thai baht and South African rand are the best performers, but the JP Morgan Emerging Market Currency Index is slightly weaker today after posting its best gain in a month yesterday (~0.75%).  Industrial metals are firmer.  Tin and nickel shortages are behind their surge, while iron ore prices are up 2%+ for the third consecutive session and at their best level since last August.  Copper prices are extending yesterday’s 2% rally.  Crude is consolidating a three-day rally that lifted March WTI to almost $86.80.  US natgas tumbled almost 5.9% yesterday and is straddling the $4 level today.   The Dutch benchmark is paring initial follow-through after dropping 8.3% yesterday.  

Asia Pacific

China’s loan prime rate was cut.  The one-year rate was cut by 5 bp in December and 10 bp earlier today to stand at 3.7%.  The five-year loan prime rate was cut by only five basis points (to 4.6%).  This was less than expected and is seen as a cautionary signal about the property market.  Still, policymakers are seen taking other efforts to promote stronger growth more broadly.  Further easing by the PBOC is expected.  

Japan reported a smaller than expected December trade deficit.  Exports did not pullback as much as expected.  After rising 20.5% year-over-year in November, they slowed to a 17.5% gain in December.  Imports slowed more than expected, to 41.1% from 43.8%.  This is broadly consistent with the seasonal pattern that December often sees improvement from November.  Last year, Japan reported an average monthly trade deficit of JPY122.7 bln.  In 2020, the average monthly trade surplus was JPY32 bln. An average trade shortfall of almost JPY140 bln was recorded in 2019.  Yet, through this period, Japan continued to experience a current account surplus, driven not by trade in goods and services, but by the return on foreign investment.  

Despite new social restrictions, Australia’s December jobs data was better than expected.  Overall job growth was near 65k (Bloomberg median was for an increase of 60k), and the unemployment rate tumbled to 4.2% from 4.6% (4.5% anticipated).  Three-quarters of the jobs were full-time positions, and the participation rate was steady at 66.1%.  The swaps market has about 40 bp of tightening priced in over the next six months.  The central bank has pushed against such expectations.   It meets again on January 31.

The US dollar recorded a new low for the week near JPY114.00, where a $520 mln option expires today.  It has not been able to rise much about JPY114.50.    We suspect the North American market can probe the upside.  A close above JPY114.60 would help stabilize the tone.  The Australian dollar is firm after the employment data pushed it to new highs for the week just shy of $0.7260.  The market does not seem to have the energy to test the $0.7290-$0.7300 area, where options for around A$660 mln lay. The dollar spent the entire mainland session below CNY6.35.  The PBOC set the dollar’s reference rate at CNY6.3485, the strongest in three years, and stronger than the Bloomberg survey projected (~CNY6.3478).  Still, state-owned banks (aren’t they all?) were seen on the dollar’s bid when it approached CNY6.3400. 

Europe

The economic news stream is light.  The ECB’s record of last month’s meeting will be published shortly, but it tends not to be a market mover.   The December CPI was revised to show a 5.0% year-over-year increase rather than 4.9%, while the monthly increase remained at 0.4% and the core rate was steady at 2.6%.  

The US and Europe agree that a Russian invasion of Ukraine needs to be resisted, but there is still differences on the response.  Biden raised the prospect yesterday of something short of a full invasion, which he acknowledged would complicate the response. Russia has continued to reinforce its troops and artillery.  US Secretary of State Blinken and Russia’s Foreign Minister Lavrov are to talk tomorrow.  Russia continues to deny plans to invade but demands concessions from NATO that will not be forthcoming.  This hangs over the markets like the sword of Damocles. 

Norway’s Norges Bank kept rates on hold today, but reaffirmed a hike in March, which would be the first meeting with a new governor, who has yet to be named.  The swaps market sees 85 bp of tightening this year.  Last year, it hiked rates in September and December.   Elsewhere, we note that as widely expected Turkey’s central bank left the one-week repo rate unchanged at 14.00%, lending credence to ideas that the easing operations are complete after 500 bp in cuts were delivered in the last four months of 2021.  

The euro is trading quietly in less than a 30-pip range below $1.1370. The $1.1380 area is the (38.2%) retracement objective of the decline from last Friday’s high near $1.1485.  A break of $1.1340 could see $1.1320 but a close below $1.1300 is needed to lend credence to ideas that a high is in place.  There is a large option (nearly 1.1 bln euros) at $1.1350 that expires today.  Sterling is coiling.  It is inside yesterday’s range, which was inside Tuesday’s range (~$1.3575-$1.3660).  The consolidative tone may persist today ahead of tomorrow’s retail sales, where there could be room for disappointment after a 1.4% gain in November.  

America

The US reports weekly initial jobless claims, the Philadelphia Fed survey, and existing home sales.   The high frequency data points may pose some headline risk, but the market is focused on policy ahead of next week’s FOMC meeting.  That said, the Empire State manufacturing survey, reported earlier this week, was a disappointment, while yesterday’s housing starts, and permits were stronger than anticipated.

Canada’s December headline CPI yesterday was in line with expectations (4.8% vs. 4.7% in November), but the underlying core measures were firmer.  The Bank of Canada meets next week, and the swaps market has a little more than a 2/3 chance of a hike.  Tomorrow, Canada reports November retail sales, which are expected to be robust (1%+). Mexico reports its December unemployment, which is expected to have drifted lower.  

The greenback is chopping roughly between CAD1.2450 and CAD1.2550 for the sixth session.   This consolidation phase follows the US dollar’s decline from last year’s high on December 20 near CAD1.2965.  Without re-kindling the downside momentum, the greenback may be set up for a bounce.  The Slow Stochastic is turning up.  The CAD1.26 area is technically important.  It is the neckline of a head and shoulders pattern.  The dollar’s downside momentum faded against the Mexican peso.  Despite repeated attempts, it could not punch below the 200-day moving average (~MXN20.2850) and bounced yesterday to close above MXN20.50 for the first time since January 5.  It is in a narrow range straddling MXN20.50 today. The intraday technicals caution against chasing the dollar higher.  A pullback toward MXN20.40-MXN20.45 looks reasonable.  



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