Overview: The 2% slide in the S&P 500 to new lows for the year yesterday hit Asian and European equities today. Bond yields are lower, and the dollar is softer against most major currencies. The dramatic equity losses and some disappointing data sparked doubts about the ability of the Fed to raise rates tomorrow at the conclusion of its last meeting of the year. India shares continue to buck the trend and advanced for the sixth sessions. The Nikkei lost 1.8% but held above the key 21000. European bourses are lower, and the Dow Jones Stoxx 600 is off for the fourth consecutive session and is back near year’s lows set last week. Fixed income draws savings. Core benchmark 10-year yields are off two-three basis points, while peripheral yields are down a little less. The 10-year German Bund was yielding almost 60 bp in early October. Today it is near 23 bp. The low for the year was set in May near 18 bp. It finished last year a little more than 40 bp. Oil prices continue to plunge. January WTI is off more than a dollar a barrel for the third consecutive session. It broke below $50 a barrel yesterday and today, briefly traded below $48.
There is no end to the Brexit drama. Labour is pushing for a vote of confidence in the government, which is different than last week’s confidence vote within the Conservative Party. No date has been set. Today, the UK cabinet will decide how to proceed with preparations. The choices are pretty stark. Stop preparing for no agreement. Maintain current pace and arrangments. Boost efforts and centralize preparations. The government resists what appears to be growing pressures for a second referendum, but according to a local press report, the legal advice the government was given, rules it out.
The German IFO makes for sober reading. The overall assessment of the business climate fell for the fourth consecutive month, and 101.0 it is at new lows for the year. Indeed, it is the lowest since December 2016. The components were equally dismal. The assessment of the current situation fell to 104.7 from 105.5. It is the lowest since June 2017. The expectations index fell to 97.3 from 98.7. This is a four-year low. The IFO like the ZEW survey seems sensitive to the performance of the DAX. The German stock market fell for the fourth consecutive month in November and has only risen in the three of the first 11 months of the year. December is shaping up to be true to trend.
Macron’s agenda is in disrepair. Although the Yellow Vests protests may have lost some momentum as the approaching holidays would have done in any event, the impact on the French government will likely be more durable. With Italy making overtures to the EC and is not only revising its projected 2019 deficit but is also making its assumptions more acceptable, the French challenge is threatening to eclipse it. Reports indicate that the government will bring its 2019 growth forecast more in line with others at 1% rather than 1.5%. This may still be a stretch. With the economy having contracted in Q3, the recession-watch (as in back-to-back declines in GDP) is on high alert. Macron is to meet with union officials today, but his intended overhaul of unemployment benefits (which for some could be five times the minimum wage) is likely to face strong resistance.
The euro is continuing to recover from the slide that took it to around $1.1270 before the weekend. It has moved toward $1.1390. Last week’s high was seen near $1.1445. There is a nearly 900 mln euro option at $1.1402 that expires today, and another roughly 720 mln euro-option at $1.1430 that will be cut today. Since November 27, the euro has closed consistently with a $1.13-handle. Sterling is also trading firmer. Initial resistance is seen near $1.2660, but the high from the second half of last week around $1.2685 is coming into view. The UK reports November CPI tomorrow, and it is expected to have slipped a little. Thursday sees November retail sales and a modest recovery is expected after declines in October.
The drop in oil prices and concerns about the weakness of the US economy may be taking a toll on the Canadian dollar. It is struggling to benefit from the softer US dollar tone. The US dollar continues to straddle the CAD1.34 area. Norway, the other major oil producer among the major economies, is also seeing the krone weaken. The Dollar Index recorded the year’s high before the weekend near 97.70. It is being pushed back below 97.00 today. The next level of chart support is seen near 96.35.