Friday, January 15, 2016

"Bloody Friday"

From Marc to Market:
The recovery of US shares and oil yesterday provided short-lived.  Asian shares were dragged lower with the help of Chinese equities.  The 3.5% fall in the Shanghai Composite today brings the year-to-date decline to a little more than 18%. Taiwan, which goes to the polls this weekend ( the opposition that has been critical of the government's pro-China policy is ahead) bucked the trend to post minor gains.

European shares are also moving lower, with the Dow Jones Stoxx 600 off more than 1.7% near midday in London.  The energy sector is leading the way with losses more than 2% today.  With US production still higher than anticipated, and Iranian oil to hit the market as early as next week, oil has been drilled back below $30, reflecting a nearly 3.5% decline on the day.

The US dollar itself is mixed.  It stands at the fulcrum.  The dollar-bloc currencies, sterling, and the Scandis are lower while the euro, yen and Swiss franc are firmer on the day.  Of note the, Australian dollar is the weakest of the majors, off 1.5% to new multi-year lows.  The Canadian dollar is off 1%, as the greenback pushes through the CAD1.45 level for the first time since 2003.   Sterling is also at new multi-year lows, slipping below $1.4335.

The euro had flirted with the lower end of its $1.08-$1.10 trading range that has largely bounded activity since the ECB meeting in early December and has recovered to the middle of the range.  The gains in the euro when share prices suffer sharp losses seems to reflect the unwinding of the use of the euro as a funding currency and short euro hedges.

For the third consecutive session, the dollar encountered sellers in near JPY118.30.  The broad risk-off, with weakness in equities and the lower US yields, kept greenback on the defensive.  The selling pressure eased near JPY117.25.  A break would signal a retest on the recent low near JPY116.70.

It is the one-year anniversary of the Swiss National Bank's decision to lift the franc's cap.  The dollar is trading with a softer bias, but above CHF1.0.  The euro had been near CHF1.20 a year ago. It fell to nearly CHF0.85.  The recovery high was seen last September near CHF1.1050.  It is now near CHF1.0950.

Despite the dramatic market moves, there does not appear to be fresh catalyst.  Given the price action since the start of the year, what stands out is not so much today's directional moves, but yesterday's brief reprieve that appears to be a bit of a bull trap.  Moreover, given the importance of developments in China and the oil market, it seems unreasonable to expect a recovery in North America today as there was yesterday....MORE