The End is Nigh

Overview:  With many financial centers closed for the solar New Year, last-minute profit-taking and positioning are evident.   After posting modest declines, albeit the most in a few weeks, the losses in Europe and the US yesterday carried into the Asia Pacific session today.  Most of the markets that were open fell, led by a 1.7% decline in Australia, which finished the year up a little more than 18%, its best year in a decade.  Malaysia, the worst-performing Asian market, lost 1.65% to bring the year’s decline to -6%. China bucked heavy regional tone to post modest gains, perhaps with a better than expected official manufacturing PMI.   The Shanghai Composite finished the year up 22.3%. Most European bourses are closed, but those that are open, like the UK, France, and Spain, are nursing small losses.  The Dow Jones Stoxx 600 is up a little more than 23% this year.  US shares are little changed, and the S&P 500 is up 28.5% coming into today.  Bond markets are subdued though a little upward pressure was seen in the Asia Pacific region, and the US 10-year is straddling the 1.90% level.  Although most benchmark 10-year yields are lower this year, the declines have been pared in recent months.  At the end of 2018, there were about $8.3 trillion in negative-yielding bonds, and now there are around $11.2 trillion, having peaked near $17.3 trillion at the end of August.  The US dollar continues to trade heavily.  It is lower against all the major currencies, and the JP Morgan Emerging Market Currency Index is posting gains for the seventh consecutive session to trim this year’s loss to about 1.3%.  What had been a strong year for the dollar turned into a mixed one.  The dollar fell against half of the 10 major currencies (Canadian dollar, British pound, Swiss franc, Japanese yen, and New Zealand dollar). 

Asia Pacific

China reported its official December PMI.  Although the media seemed to like it, we are less sanguine.  The manufacturing PMI was unchanged at 50.2.  The Bloomberg survey found a median expecting 50.1, but is this really more than a rounding error?  And the non-manufacturing PMI selling to 53.5 from 54.4. Since midyear, the composite PMI has alternated between gains and losses.  It stood at 53.3 in May and now is at 53.4.  Output rose to 53.2 from 52.6, but new orders slipped to 51.2 from 51.3, and employment in both sectors remained below 50. 

Japanese markets are on holiday, and last year during this period was a violent flash crash.  Some fear a repeat of some sort.  Reports suggest dollar bids have been placed in the JPY105-JPY107 area, just in case.  The dollar held above JPY108.70 yesterday, where the 200-day moving average was found but has been pushed marginally below there today.  A shelf forged earlier this month is seen near JPY108.40.  The sell-off in the Australian bonds and stocks today did not dent the demand for the Australian dollar.  It is extending its foray above $0.7000.  It finished last year near $0.7050.    The Chinese yuan strengthened to test its best level since early August.  The greenback is at CNY6.96, and it has not traded below there since August 2.  When it is all said and done, the dollar gained about 1.2% against the yuan this year. 


News from Europe is light.  There are two main developments to note.  First, UK Chancellor of the Exchequer Javid confirmed that the minimum wage will be hiked by 6.2% on April 1.  It currently is at GBP8.21.  Javid has promised to raise it to GBP10.50 (~28%) within five years.  Second, the French public strike appears to be winding down, and it may be difficult to re-invigorate it after the holiday.  It has lasted about 3 1/2 weeks.  Reports suggest that 2/3 of the train drivers have returned to work.  

The euro briefly poked above $1.1220 yesterday and is consolidating in uninspired activity today. The $1.1225 area corresponds to a (38.2%) retracement of the year’s decline.   It finished last year a little below $1.1450 and reached a high near $1.1570 in January.  The low for the year was recorded in early October near $1.0880.  Sterling is pushing above yesterday’s $1.3150 high.  The next target is $1.3210, which is the (50%) retracement of the decline from the spike to $1.35 on the initial election results.  It finished last year near $1.2755.  


The Federal Reserve may be making up its playbook as it goes along, but it appears to have succeeded in avoiding a disruptive year-end funding squeeze.  Its fourth consecutive term repo operation, conducted yesterday’ was under-subscribed, and the overnight operation saw demand for only $30.8 bln of the $120 bln that was offered. Some critics seem to be shifting their angst from what the Fed is doing to how it ceases its liquidity operations.  Powell suggested at this month’s FOMC meeting hinted at the temporary nature of the repo operations, and the T-bill purchase commitment was “only” into Q2.  

Yesterday the US reported a preliminary October goods deficit that was 10% smaller than expected.  At $63.2 bln, it was the lowest in three years.  Exports rose 3.4%, helped by the automotive sector, while imports fell 2.6% on a broad-based decline.  The average monthly deficit through November stands about $70.9 bln compared with $72.3 bln in Jan-Nov 2018 and $65.6 bln in the same period in 2017.  While some economists may upgrade their Q4 GDP forecasts based on these trade figures, we suspect it will be more an issue of the composition of growth.  Trade may be less of a drag, but some demand appears to be being met out of inventories rather than new production, and the consumption may be less vibrant. 

The US dollar has extended its recent slide against the Canadian dollar.  It punched through CAD1.3100 last week and is being pushed below CAD1.3050 today.  The year’s low was set in July near CAD1.3015.  The greenback’s broad weakness and higher oil/commodity prices may be being exaggerated in these thin markets.  The Canadian dollar is the strongest of the major currencies this year, gaining about 4.65% against the US dollar.  The Mexican peso has lagged a little behind the Canadian dollar, and it is up 3.85% against the US dollar this year, making it the third-best emerging market currency this year behind the Russian rouble (~12.5%) and the Thai baht (~8.6%). The dollar bounced off the MXN18.80 area yesterday.  It only closed below there twice this year (April).  Initial resistance is seen near MXN18.95.   The Dollar Index is trading heavily today, for the seventh consecutive session.  This year’s gains have been pared to about 0.4% to finish the year near five-month lows (~96.55).  


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