Sterling Continues to Unwind Election Gains

Overview:  In light volume, equities are trading with a heavier bias, bonds are mostly firm, and the dollar is softer against the major currencies.  China’s equities standout with the Shanghai Composite falling over 1%.  South Korea, Australia, and Indian markets eased, but most of the smaller bourses gained. Japanese benchmarks were mixed.  Europe’s Dow Jones Stoxx 600 is slightly lower, led by losses in financials and utilities.  US shares are little changed.  Benchmark 10-year yields are 1-2 bp lower, led by the UK Gilts.  Of note, the generic 10-year Japanese government bond yield is above zero for a third consecutive session.  The amount of negative-yielding bonds in the world has fallen to about $11 trillion from a $17 trillion peak six-months ago, according to the Financial Times estimate.  The foreign exchange market is becalmed, and only sterling and Swedish krona among the majors is struggling to gain against the greenback.  The New Zealand and Australian dollars are leading the move with about a quarter percent advance.  The JP Morgan Emerging Market Currency Index is flat today.  It has risen by a little more than 2% during the past three-week advance.  Gold is higher, and if it holds on it its gains, it could close at its highest level since early November.  February WTI reached $61.40 last week but has eased back to test support near $60.  

Asia Pacific

China announced it would cut tariffs on 859 types of products–from frozen pork, paper products, to some parts to manufacture smartphones to levels below what is levied on most favored nations.  The goods covered account for almost a fifth of China’s imports in 2018 or nearly $390 bln.  Although the move does is separate from negotiations with the US, it is consistent with other measures that Beijing has taken to secure its supply lines and promote trade, which still seems integral to its development strategy.  

Japan’s Prime Minister Abe will meet with South Korea President Moon in China tomorrow.  It will be both cause and effect of easing tensions.  As tensions rose earlier this year, Japan strengthened export controls on some chemicals needed for high-tech industrial purposes in South Korea.  It relaxed restrictions on one of three chemicals targeted.  In response to the controls, South Korea had threatened to stop sharing military intelligence, though last week, the pact was extended.  At the heart of the issue, South Korea’s unhealed scars from the 1910-1945 period of Japanese colonization of the Korean peninsula.  

Last Thursday, the dollar traded between roughly JPY109.20 and JPY109.70.  It was stuck in that range ahead of the weekend and remains in that range today (~JPY119.35-JPY119.55).   The tested the lower end of the range in the quiet European morning, and the intraday technicals suggest a small upside bias in North America today.  The Australian dollar is extending its three-day advance and has pushed above its 200-day moving average (~$0.6910).  It has flirted with the moving average on an intraday basis but has not closed above it since March 2018.  Earlier this month, it spiked to almost $0.6940 but reversed (December 13) and closed a full-percentage point lower.  The intraday momentum was stalling as the European morning progressed.  The dollar traded within the pre-weekend range against the Chinese yuan.  After four sessions of finishing the Beijing session below CNY7.0, the dollar will likely close today above that once an important threshold for the fourth session.  


The US has reached a trade agreement with China.  Updating NAFTA is nearly accomplished.  The US struck a trade agreement with Japan.  Europe is moving into the crosshairs for US trade warriors.  There are several outstanding issues, and the US struck the first blow before the weekend.  President Trump signed a bill that imposes sanctions on companies laying the Nord Stream 2 pipeline. A Swiss-Dutch company (Allseas) nearly immediately announced it was halting its pipe-laying activity.  The US seeks to sell its own liquified natural gas to Europe and argues that the pipeline makes Europe even more reliant on Russia, which supplies about a third of Europe’s gas needs. Germany and the EU condemned the US sanctions but do not appear prepared to impose sanctions of their own. 

Italy’s coalition government scrapped the VAT hike (25.2% vs. 22%), and this is projected to spur a small increase in the structural deficit (0.1%) rather than the (0.6%) reduction the EC had sought.  The pushback from the EU seems modest.  However, the budget may prove insufficient to bind the coalition tighter.  New strains are being reported over making new laws that make it easier for the government to revoke a highway concession arising out of a case against a company that managed the part of a highway in which a bridge collapsed in 2018).  It is not clear whether there were substantive or primarily procedural differences between the Five-Star Movement and the Democrat Party, but in any event, tensions are likely to rise next year.  

After selling-off ahead of the weekend (~0.4%), the euro languishes near in a narrow 16-tick range through late in the European morning. There is an option for almost 930 mln euros at $1.1070, just below the current low for the day, that expires and another one for 620 mln euros at $1.1105.    It looks like stale longs continue to exit sterling, which had spiked to $1.35 in response to the exit polls showing the Tory victory.  It has taken out the pre-weekend low and has fallen to about $1.2965. Today’s high was a little above $1.3030, making it potentially the sixth session of lower highs (saw $1.3080 before the weekend).  Strong support is not seen until closer to $1.28.  


The US reports November durable goods orders today.  It will reinforce ideas that after being a drag on growth in the past two quarters, business investment is likely contributing here in Q4.  Headline durable goods orders expected to rise by 1.5% after a 0.5% gain in October.  It would be the strongest since July.  Most of it will be related to transportations, and there may be downside risk in Q1 20 given Boeing’s recent announcement.  Excluding this volatile sector, orders may have risen a milder 0.2%. Looking at shipments of durable goods excluding defense and aircraft, which economists typically use for GDP purposes, may take some shine off the report if it comes in near flat as many expect after a 0.8% gain in October.  The US also reports November new home sales, where a small decline in expected, the second consecutive one, but after an August and September surge.  The Chicago Fed’s national business activities index does not draw much attention even in the best of times. That said, we note that while it may improve sequentially, it is expected to have remained below zero for the third consecutive month.  

Canada will report October GDP figures, and the risk is for a small contraction.  The recent string of real sector data has been disappointing.  It culminated with the poor retail sales report before the weekend. October sales fell by 1.2%.  The median forecast in the Bloomberg survey called for a 0.5% increase.  Excluding autos, sales fell by 0.5%.  It was the third consecutive decline.  

Before the weekend, Argentina missed a $67 mln payment and will not make a $280 mln payment due today on roughly $9 bln of dollar-denominated debt.  It is the delay in five months.  The debt servicing has been pushed back to August, but there is good reason to suspect that this date will not be met either.  Individual investors and provinces that are exempt from the postponement, which immediately elicited a response from Fitch (“restricted default”) and S&P (selective default).  Newly elected President Fernandez is seeking to restructure most of the country’s $332 bln of debt, including IMF loans for $57 bln from last year’s program, the largest for the multilateral lender.  The day before the missed payment, Argentina’s central bank cut its key rate to 58% from 53%.  As part of the emergency economic measures, the Chamber of Deputies passed a bill that will boost the tax on exports, including grains and tax personal property held abroad.

The US dollar recovered from about CAD1.3120 to around CAD1.3180 in response to the retail sales disappointment before the weekend.  It has traded on both sides of CAD1.3150 today in the quiet turnover.  Support is seen in the CAD1.3130-CAD1.3140 area.   The dollar began the month near MXN19.60.  It was below MXN18.90 at the end of last week.  However, the momentum has stalled, and carry-positions appear to have been set.  The Dollar Index is in a little more than a 10-tick range below the 200-day moving average found at 97.70 today.  


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