US Equities Set Pace, While Greenback Consolidates Inside Monday’s Ranges

US tax changes appear to be providing fuel for the year-end
advance that has carried the major indices to new record highs. 
 The coattails are a bit short, and
while global equity markets are firm, they are unable to match the strength of
US.   Despite a heavier tone in Japan, Taiwan, and Korea, the MSCI Asia Pacific Index edged
higher for the second session but remains around one percent below the record
highs set in late November.
The Dow Jones Stoxx 600 is
flat near midday in London.  
It is about two percent below the high for the two-year set in
early November and about five percent below 2015 high.  This European
benchmark is up an 8.65% year-to-date.  For dollar-based investors, the
index is up 22% on an unhedged basis. 
The S&P 500 is up 20% coming into today’s session, and the Dow Jones Industrials is up 25%.
The US dollar is trading
within yesterday’s ranges amid light news. 
  The focus in the US is on the
tax changes which the House will likely vote this afternoon.  The Senate
vote could come later today or early tomorrow.  Toward the end of last
week, we had suggested the risks that the bill is
defeated were greater than many investors seemed to appreciate.  
Apparently, at the last minute, a provision was added
that gives about a quarter of the Republican Senators a new tax cut through
their real estate shell companies.
  It was not in the original bill that was passed by the
Senate on December 1.  Reports suggest that the Chair of the Senate
Finance Committee that drafted the bill included it in the final measure. 
It appears that the measure will ensure passage.  
Sterling is the weakest of the
major currencies today. 
 Brexit is the driver. 
Specifically, UK still seems to be in collective denial.  It hopes to draw
the benefits of being in a single market without actually being in it. 
Specifically, the EU’s chief negotiator ruled out a carve-out for UK financial services post-Brexit.  When the UK
leaves the EU, its financial services will not enjoy a passport arrangement
that will allow it to provide financial services to other EU members on the
same terms it currently
That said, the EU has not
given negotiating instructions to Barnier and his team yet that covers the second stage of talk, the
post-Brexit trade relationship.
  That is earmarked for
March 2018.  The next couple of months will be spent discussing the
transition period the UK seeks.  However, Barnier is unlikely to be
straying far from the sentiment and intentions of the EU with this interview in
the Guardian.  
Note that the UK cabinet
took up the “end state” or the post-Brexit relationship for the first
time in a formal discussion.
  Reports suggest a meeting of the minds that the starting
point is that there are identical rules and regulations and that deliberately
and selectively it will move away.  This
is hardly reassuring to the EU, and below the surface, the predicament posed by
the unresolved Irish border is festering.  
The EU appears determined
that the UK cannot adhere to the red lines that May has
articulated–controlling immigration and free of the European Court of
Justice–and have access to the single market, including for financial
immovable object meets an irresistible force, and
this will continue to dominate the discussions next year.  
The German IFO saw a decline
in the expectations component of the December survey, but the current
assessment rose to approach the record high set in July.
  However, more importantly, wage
growth in the euro-area disappointed.  In the three months through September, wages rose 1.6%
year-over-year.  This is down from
2.1% in the previous three-month period.  The report supports the
cautiousness expressed by Draghi at the press conference last week.  
The euro retreated in the
North American session yesterday from about $1.1835 to roughly $1.1775.
  This range has held in Asia and the
European morning. The cross-currency basis swap has continued to correct from
the spike seen at the end of last week, which we suggest is primarily a
function of intense year-end scramble    There is a large option
(~785 mln euros) struck at $1.1775 that expires today.  
The dollar has traded in
less than a 20 pip ranges against the yen today.
  The JPY112.50-JPY112.65 has caught
the bulk of the price action.  The US 10-year yield is flat just below
2.40%.  There is an $866 mln option
struck at JPY112.50 that will be cut
Sterling recorded its lows
(~$1.3350) early in the European morning and quickly snapped back.
  It can challenge the $1.3400 high
seen in late Asian turnover.  It is the third session of lower highs and
higher lows as if a spring is coiling.  
The Canadian dollar also
appears to be coiling in tighter ranges. 
 Despite Bank of Canada Governor
Poloz signaling the likelihood of a rate hike next year, the Canadian dollar
remains pinned to the lower end of two-month trading range against the US
dollar.  The greenback seems capped in the CAD1.2910 area.  It has
closed below CAD1.28 once in the past nine sessions. 

For its part, the Australian
dollar is stuck in the range seen before
the weekend–roughly $0.7640 to $0.7700.
  The minutes from the RBA’s recent meeting showed greater
confidence in the labor market, underscored by the recent strong November
report, but, as other central banks, is not sure when the tightening of labor
conditions translates into higher wages and inflation.   We see the
RBA steadfastly on hold for the next couple of quarters at least.   


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