No Turnaround Tuesday For Equities?

The MSCI Asia Pacific equity index fell for the third consecutive session. European bourses were heavy after the Stoxx 600 posted an outside down day yesterday. Today would be the fifth consecutive decline. Selling pressure on the US futures indices continued after yesterday's losses.

Australia and New Zealand bonds played catch-up to the large drop in US Treasury yields yesterday, while European benchmark yields were edging higher. The 10-year US Treasury yield was around 1.43%.

The dollar was mixed against the major currencies. The Canadian and Australian dollars and Norway were softer, while the Swiss franc and euro led with around a 0.25%-0.35% gain.

Most emerging market currencies were little changed, though the Turkish lira was paring yesterday's intervention-fueled gains. Led by the Hungarian forint ahead of the outcome of the central meeting, and helped by a firm euro, central European currencies led the emerging markets. The JP Morgan Emerging Market Currency Index was off for a second session after breaking a four-week slide last week.

Gold continued to consolidate and was within yesterday's range (!$1782-$1791). Oil was also trading quietly, with the January WTI contract in a $70.50-$72.00 range. European (Dutch) natural gas was rising for the sixth session of the past seven, during which time it increased by nearly a third. US natgas fell by almost 30% in the past two weeks and was off for about 4.4% this week already. Iron ore was paring yesterday's 6.5% gain, while copper was drifting lower and was extending its loss into the fourth consecutive session.

Year-end pressures were evident in Japan's money markets, and the BOJ responded by arranging an unscheduled repo operation for the second consecutive session. Yesterday's overnight operation was for JPY2 trillion (~$17.5 bln) after the repo rate rose to two-year highs. The repo appeared to have been lifted by dealers securing funding for bill purchases. Today the BOJ offered to buy JPY9 trillion of bonds under the repo agreement.

The US offered to lift the steel and aluminum tariffs on Japan on similar terms as the deal struck with the EU. A certain amount, based on some historical market share, can be shipped to the US duty-free, but over that threshold, a levy will be imposed. Unlike the EU, Tokyo did not impose retaliatory tariffs. Estimates suggested that Japan shipped around 5% of its steel to the US, though some might have made its way through Mexico.

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The regional highlights for the week still lay ahead. Tomorrow, China reports November retail sales, industrial production, new home prices, investment, and the surveyed jobless rate. Retail sales are expected to have slowed, while industrial output may have firmed. Investment in property and fixed assets may have stalled.

Japan has its tertiary index (October) tomorrow, a November trade balance on Thursday (it nearly always deteriorates from October), and the Friday BOJ meeting. The BOJ is expected to extend some of its emergency facilities. Australia reports its November jobs data first thing Thursday morning in Canberra. After three months of job losses, a strong report is expected as social restrictions were lifted.

Today, the dollar was confined to about a quarter of a yen range above JPY113.50. It has not traded above JPY114.00 this month so far. Nor has it traded below JPY113.20 since last Monday. An option for $760 mln at JPY1113.85 rolled off today.

The Australian dollar tested the session high near $0.7135 in the European morning but met a wall of sellers, perhaps, related to the nearly A$600 mln option at $0.7130 that expired today. It traded down to a five-day low around $0.7090, which was the halfway point of last week's rally. The next retracement (61.8%) was near $0.7065.

The dollar continued to struggle to sustain upticks against the Chinese yuan. It was trading heavily today, its seventh loss in the past eight sessions. Still, the greenback held above yesterday's low (~CNY6.3580). It was unable to poke above CNY6.37. The PBOC's dollar fixing was set at CNY6.3675, while the market (Bloomberg survey) anticipated CNY6.3666.

The UK reported solid employment data. The November claimant count rate eased to a 49k decline from a revised 50K (initially 51K) after the October decline was revised to 58.5k from -14.9k. The pace of earnings growth slowed to 4.9% from 5.9% (three-month, year-over-year). Employment rose by nearly 150k (three months) after a 247k increase previously. Tomorrow, the UK sees November CPI and PPI. Both are expected to have quickened from October. Nevertheless, the BOE has been seen as on hold until February.

Hungary's central bank was set to hike the base rate today. A 40 bp increase would follow last month's 30 bp hike. Today's move would be the sixth in a row. The base rate began the year at 60 bp, and today's hike would lift it to 2.50%. On Thursday, Hungary will likely hike the one-week deposit rate. It has been hiked for the last four weeks. It had been at 75 bp until June, when it was hiked by 15 bp. It was lifted by 30 bp in July and again in August. Ir reverted to 15 bp increases in September and October. The one-week deposit rate was raised several times last month to 2.90%. It is up another 40 bp so far this month, and it is expected to be lifted by another 20 bp this week.

In October, industrial output in the euro area rose 1.1% after a 0.2% decline in September. The preliminary PMI will be reported on Thursday, ahead of the ECB meeting. Activity likely slowed. The focus of the ECB meeting would be on the guidance about bond-buying next year.

The emergency facility was expected to wind down at the end of Q1, but given that it would still be buying bonds, tapering might not be as necessary or pronounced as, say, with the Federal Reserve. The ECB staff are also to update forecasts, including a sharp upward revision to next year's while extending the projections to 2024. There was also interest in what the ECB will do about its long-term loans (TLTRO).

The euro firmed in the European morning but remained mired in a narrow range. Indeed, the range over the past five sessions was a little less than a cent (~$1.1260-$1.1355). There was an option for nearly 500 mln euros at $1.1330 that expired today. For the past month, the euro was in a $1.12-$1.14 trading range, with the notable exception on Nov. 24, when the low for the year was recorded (~$1.1185).

Sterling slipped below $1.32 in late Asian turnover but found bids lurking there, and Europe extended its recovery toward $1.3235. Resistance was seen in the $1.3260-$1.3275 area. Sterling has not traded above $1.33 since Dec. 3, yet a move above there was necessary to lift the technical tone.

The US reports November producer prices today. The headline rate was expected to push above 9%, while the core rate was to poke through 7%. The market would understandably be more sensitive to consumer prices than producer prices. Tomorrow, ahead of the FOMC statement, the November retail sales (softer than the 1.7% headline increase in October) and the December Empire manufacturing survey will be released.

Although the Senate was expected to maneuver to lift the debt ceiling today, the Treasury was planning a large bill pay down (~$175 bln) to ensure it would have the space to settle the coupon auctions. That said, the supply of bills was likely to improve through Q1 22, according to estimates. By most accounts, the Treasury has overfunded itself, and this will allow it to cut back further on new supply, just as the Federal Reserve is expected to accelerate its tapering.

The Bank of Canada was told its inflation target remained 2% but that it could overshoot to support "maximum sustainable employment."  The central bank's language was important. It said it would "continue" to support the labor market objective, suggesting that yesterday's adjustment to the mandate will have a minor operational impact.

In fact, with inflation (October CPI 4.7%, an 18-year high), Governor Macklem quickly indicated that this was not the situation when it could probe for the maximum sustainable employment. Still, the new mandate required that the central bank explain when it was using its new flexibility and how labor market outcomes were incorporated into monetary decisions.

Separately, Canada was proposing alternatives to the US proposed tax incentives for electric vehicles in the Build Back Better initiative. Canada and Mexico claimed that it violated the USMCA and threw a wrench in the 30-year auto integration. The EU trade commissioner also expressed concerns about whether the legislation would break the WTO rules too.

Late today, Chile's central bank was expected to deliver a 125 bp rate hike, the same as in October. The overnight target rate began the year at 50 bp. It was hiked by 25 bp in July and 75 bp in August. With today's hike, it will stand at 4%. More work was needed as November CPI was at 6.7%.

Chile holds the run-off presidential election this weekend. In the first round last month, the conservative Kast drew 28% support while the left candidate Boris garnered 26%. Chile's innovation during COVID was to allow people to withdraw funds from their pensions (yes, like a farmer eating their corn seed). Three withdrawals were granted, but a fourth effort was rebuffed earlier this month.

The World Bank and the IMF expressed concern about the pension fund industry, which had been among the best in the region. The Chilean peso was among the worst-performing emerging market currencies this year. It has fallen nearly 15.5% and has only been "bested" by the Argentine peso (~17.3%) and the Turkish lira (-48%).

The Canadian dollar's retreat was being extended for the fifth consecutive session. The greenback largely held above CAD1.2800 and was drawing near the high seen after the employment reports on Dec. 3 (~CAD1.2855).

We usually see the exchange rate driven by 1) general risk appetite, 2) commodity prices, and 3) rate differential. Here we note that Canada's 2-year premium has fallen from about 60 basis points at the start of last month to around 27 bp now. Over the same time, the 10-year premium has wholly disappeared. It was almost 20 bp on Nov.1 and currently is trading at a four basis point discount.

Meanwhile, the greenback was consolidating against the Mexican peso. For the fifth consecutive session, it has been mainly chopping in a MXN20.85-MXN21.08 range. On Thursday, Banxico is expected to hike its overnight rate by 25 bp. We continue to think it is more likely to hike by 50 bp than stand pat. Since June, it has lifted the target rate by 100 bp to 5%. November CPI stood at 7.37%.

Written By: Marc Chandler