Capital Markets: "Greenback is Softer but the Market may be Getting Ahead of Itself"

From Marc to Market:

Overview: Global equities paid no mind to the losses seen in the US before the weekend. After falling for three weeks, Asian equities rallied, led by a recovery in technology. The Hang Seng set the pace with a 1.7% gain, but Taiwan, Korea, and Singapore markets were up over 1%. The two exceptions were Chinese mainland markets and Australia, which traded heavier. European markets jumped higher, led by finance, energy, and consumer discretionary. Optimism that a repeat the Greek tragedy won't play out in Italy is helping lift Italian bank share the most in six months (5%+) and Italian bonds. Despite the handwringing over last week's poor retail reception, Italian bonds are extending their rally for a fourth consecutive session. The 18 bp decline today brings the four-day move to almost 40 bp. Peripheral European bonds are rallying with risk-on, while core bonds are a bit heavier. Oil prices have stabilized after the dramatic fall before the weekend, while industrial metals have fallen sharply. The US dollar is trading lower against nearly all the currencies but the Russian rouble. An escalation of hostilities between Russia and Ukraine will be subject to a UN Security Council meeting today. Gold is fractionally higher.

Asia Pacific
Economic data from the region was mixed. Japan's flash November manufacturing PMI fell to 51.8 from 52.9. This is a two-year low and dampens hopes of a robust rebound following the contraction in Q3 linked to disruptions caused by natural disasters. It had averaged 52.4 in Q3. New orders fell for the first time since September 2016. New Zealand reported a disappointing Q3 real retail sales report. It was unchanged, while economists had expected a 1% gain. Singapore reported a 4.3% (year-over-year) surge in industrial production. Economists had forecast a 2.6% gain after a 0.1% decline in September. On the month, it rose 2.0%, rebounding smartly from the revised 4.7% decline.

Local elections in Taiwan delivered the government a setback 14 months before national elections. President Tsai Ing-wen resigned as chair of the Democrat Progressive Party (DPP). Following defeats in state elections, Germany's Merkel did the same thing recently--remained head of state while helping to pick her successor as head of the CDU. The Kuomintang is both more pro-China and socially more conservative than the DPP. It is not immediately clear which was the most important driver. Referendum opposing gay marriage won, and a bid to change Taiwan's Olympic name from Chinese Taipei to Taiwan was rejected. There was the talk of China interference, while domestic issues like the economy and air pollution seemed to dominate the election.

The dollar poked through last week's highs against the yen to reach JPY113.35. Resistance is seen in the JPY113.50-65 area. Intraday technicals look tired in early Europe, and a pullback toward JPY113.00 seems more likely. The New Zealand dollar was initially sold on the disappointing retail sales report and fell to a nine-day low (~$0.6755) before rebounding. A move above $0.6820 would likely signal a retest on the recent high near $0.6885. The Australian dollar held the pre-weekend low (~$0.7220) and is poised to retest the $0.7300 area. The recent high was set at the start of last week near $0.7330.

Europe
It has been clear for some time that the UK Parliament would be the biggest hurdle for the Withdrawal Agreement. And that remains the critical issue. The Democrat Unionist Party, which allows the Tories to govern has indicated its opposition to the agreement. The EU has made it clear that it was not willing to return to the negotiation table. Prime Minister May gave in on one more issue over the weekend. After steadfastly opposing it, May acquiesced and accepted that Gibraltar is excluded from any UK-EU agreement. Spain and the UK will negotiate directly over the territory, which voted overwhelmingly to stay in the EU.... 

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