Wednesday, January 20, 2016

"Markets Resume New Year Slide"

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