Brown Bros. Harriman & Cos. Marc Chandler:
The market meltdown is extending into the third consecutive week.
Once again, the attempt to stabilize has failed, and bottom pickers have been punished.
It is easy to line up poor news developments, including IMF cutting world
growth on the same day that the IEA warns of an extended glut in the oil
market, the world's largest mining company projecting further declines in iron
ore prices and poor earnings from one of the largest oil companies. At
the same time, some keen observers, like former IMF chief economist Blanchard,
that there is an irrational element ("herding") that is overwhelming
the fundamentals. At the same time, there is concern that central banks ability
or willingness to suppress volatility (via
using their balance sheets) has been questioned.
It is not only the Fed's rate hike at the
end of last year, but it is also the ECB's reluctance to act on the sense of
urgency that Draghi had so diligently articulated, and the BOJ's operational
tweaks in the fact of disappointing progress on the central bank's self-chosen
inflation metric and an economy that is disappointing. It is
also China, which is spending hundreds of billions of dollars (reserves fell by
$108 bln in December) to prop up its yuan, which not so long ago, many heralded
to eclipse the dollar and equity prices
that by most conventional measures are
overvalued.
Equity markets are broadly lower. The 1% decline of China's
main bourses are on the small side of declines. The MSCI
Asia-Pacific Index is off around 3%, as is the Dow Jones Stoxx 600 in
Europe. Energy and financials are leading the way lower in Europe, and
the Stoxx 600 is at its lowest level since December 2014.
At this early hour, the US S&P is about 2% lower in electronic
trading.
Core bond yields have fallen with the nearly nine bp decline in US 10-year Treasury yields pacing the move.
Peripheral European bond yields are firmer, except for Spain, paradoxically,
given little progress in cobbling a new government in Madrid.
The market is also reducing its outlook for Fed policy
though it never accepted the Fed's view that four hikes would be appropriate
this year. The March contract implies an effective Fed funds rate of 38.5
bp in March (compares with an average
effective rate of 36 bp presently). The implied yield on the December
contract is 58 bp, the lowest since late-October.
Pressure has intensified on two currency pegs, the Hong Kong dollar and
the Saudi riyal. Both pegs have survived stronger challenges, and we
expect them both to remain intact. Still the HKD forward fell to their
lowest level since 1999 and reports suggest that Saudi authorities are taking
action to deter speculation against its peg.
The drop in US yields and the meltdown in equities spurred a yen advance
that pushed the dollar briefly through the JPY116 level. Government
officials quickly warned the market that they were watching the foreign
exchange market closely.
The dollar
spiked back to
JPY117; the buying dried
up. Many think that government officials are not the same as BOJ
officials....
MUCH MORE
