Wednesday, January 6, 2021

Capital Markets: "High Drama Weighs on the Greenback and Lifts Yields"

From Marc to Market:

Overview: One of the two Georgia Senate contests remains too close to call, but the market appears to be pricing in a Democrat sweep. The 10-year yield has punched above 1% but has offered the greenback little support. Yesterday, the dollar-bloc currencies rose to highs since early Q2 2018 and are extending those gains today. The Scandis are also tracking higher. The yen is the laggard, but the greenback remains below JPY103.00 Emerging market currencies have not been deterred by the higher US rates. The JP Morgan Emerging Market Currency Index is higher for the third consecutive day. The nine-day rally in the MSCI Asia Pacific Index halted today. European shares are doing better and have recouped yesterday's 0.2% decline and the Dow Jones Stoxx 600 is challenging the week's high. US shares are mixed, with the NASDAQ suffering most. The S&P is about 0.5% lower, while the Dow futures are up by nearly as much. The US Treasury sell-off appears to be triggering a global rise in yields. The 10-year yield has broken above 1.0%. Australia's benchmark jumped 8 bp, while European yields are 1-3 bp higher. Gold is firm as it extends its rally for the seventh consecutive session and approaches $1960. Oil, which jumped yesterday on the back of Saudi Arabia's surprise unilateral cut of one million barrels a day of output in February and March, is consolidating today, with the February WTI contract hovering around $50 (in a range of about 40-50 cents on either side of that threshold).

Asia Pacific
The week began off {sic} with the NYSE reversing a previous decision to delist four Chinese telecom companies. However, after complaints from several officials, including Treasury Secretary Mnuchin, who was not understood to be a leading advocate of the policy, the NYSE appears to be reversing itself again. The telecoms in question are subsidiaries of Chinese companies and were not explicitly cited, so normally would be excluded until specified. Meanwhile, S&P/Dow Jones is now suggesting it will not drop Chinese telecom companies from its index re-jig. However, the Trump administration has opened another front against China, and this is a ban on the use of transaction apps of 8 Chinese companies, including Alipay, Tencent's QQ, and WeChat Pay. These are not widely used by Americans, but it would contribute to the fragmentation if implemented by Biden's administration. As China moves more to such payment vehicles, if one does not have the proper app, it will become increasingly difficult for Americans to operate in China without a local phone and apps. Meanwhile, China has stepped up its crackdown on dissent in Hong Kong and made more than 50 arrests, including a US lawyer that acted as the treasurer for the main organizers.

Separately, China's Caixin service PMI softened more than expected, to 56.3 from 57.8.
Given that manufacturing also slowed, the composite eased to 55.8 from 57.5. The recovery is still solid but appears to have slowed marginally. The December reserve figures are out tomorrow. Another rise is expected after the $50.5 bln increase in November. Given the strong capital inflows and current account surplus, the less than 1% appreciation of the yuan in December seems too modest, which is why many see officials' hand behind the scenes. The yuan has strengthened seven-months through the end of last year. The direction alone does not satisfy many critics who want to see faster adjustment.

Australia also reported softer service and composite PMIs than the flash readings, but still an improvement from November. The services PMI is at 57.0, not the 57.4 of the flash, but well above the 55.1 seen in November. The composite reading was revised to 56.6 from 57.0 of the preliminary estimate and 54.9 in November. Tomorrow, Australia reports building approvals, but more importantly, the November trade figures, where the impact of China's boycotts may be evident in softer exports....