Tuesday, November 22, 2016

"Bonds and Stocks Rally, Leaving Greenback to Meander"

From Marc to Market, Nov. 22:
The US dollar entered a consolidative phase yesterday, and this carried into today's activity. While the foreign exchange market is sidelined as the two-week trend slows, the stocks and bonds are posting strong gains today.  Equities are being led by energy and materials, as oil and industrial metals continue to advance.  Bond are recovering from their recent slide. 

 Yesterday was the first session since the US election that the euro rose above the previous day's highs.  It is doing so again today, but the new highs are fought hard.  Initial resistance is seen in the $1.0660 area and then $1.0720.  The euro's downtrend does not appear over.  One of the key drivers pushing the euro lower is the widening interest rate differentials in the dollar's favor.  The premium the US charges is still rising.  Today it stands at a new high of 180 bp.  It is up seven basis points on the week, though the euro is up a little more than half a cent.  The premium widened by 22 bp last week and nine the week prior.  The 10-year premium is hovering around 3.0%.  Through various business cycles, the US premium rarely been greater going back to the last 1990s.  

The dollar has pulled back against the yen after approaching JPY111.40.  It is finding support in the JPY110.30-JPY110.50 band.  The US two-year premium is at new highs today near 125 bp.  It is up a couple of basis points this week after rising eight basis points last week and 11 the week before.   The 10-year premium rose to 230 bp last week, its highest in five years and is consolidating a little below there now.  

Similarly, the US two-year premium over the UK is at 93 bp.  It has not been larger since at least 1992 when the Bloomberg data starts.  The premium has risen seven basis points so far this week and 19 the week before.  The prior week the premium rose five basis points. Sterling could not maintain yesterday's upside momentum that faltered just above $1.25 in Asia.  Resistance was pegged near $1.2530.  Support is seen ahead of $1.24 as the focus shifts to Hammond's Autumn Statement that is expected to feature some new infrastructure spending.  

Many investors anticipate a deal among oil producers and have rallied oil prices to three-week highs. Our concern is that the most vocal comments suggesting a deal is likely are coming from OPEC countries like Iran and Iraq that seek an exemption from cuts or freezes.  Similarly, Russia has expanded its output to post-Soviet Union highs, seemingly anticipating the possibility of a freeze.   Moreover, the change ushered in by the US election could, through deregulation and a stronger driver to make the US even less dependent on foreign energy, could see America's output increase more than previously projected.  The January light sweet oil contract appears to have traced out a bottoming pattern that projects another run toward $54, which has stemmed rallies twice earlier this year....