Tuesday, December 6, 2016

Foreign Exchange: "You Can Almost Hear a Pin Drop"

The US dollar index is up 0.24 at 100.35.
Here's the one-year chart from FinViz:

From Marc to Market:
The foreign exchange market is quiet.  Ranges are narrow, with the US dollar mostly consolidating against the major currencies.  Given the push lower yesterday, the shallowness of its recovery warns of the greenback's downside correction after strong gains last month may not be complete.

The news stream lends itself to consolidation.  The immediate angst over Italy has calmed.  Many new reports insist on calling the defeat of the referendum as a victory for anti-establishment forces.  We demur,  and note that the opposition, nearly 60%, was only partly explained by the populist-nationalist forces, but the opposition to it was obviously widespread including in area in which the 5-Star Movement is not particularly strong.  

Moreover, as it turns out, Renzi will stay on until at least the passage of the 2017 budget, which could happen toward the end of the week.  It is possible that after the Italian President looks around for the best person to head up the government, Renzi is it.  One indication that this will not happen is if Renzi also resigns as head of the PD. 

At the same time, it looks like investors are coming around to a less apocalyptic understanding of Italian developments.  To wit:  bank shares have recouped yesterday's loss and are up about 2.6% near midday in Milan after falling 2.2% yesterday. Italian sovereign bond has also recovered.  Yesterday the 10-day yield rose eight bp.  Today it is off six bp.  What this means is that over the past week, the benchmark 10-year yield is down almost three bp, while Spain's is off two bp and Germany is up 12 bp.  A similar story is evident in the equity market.  Italian equities underperformed yesterday but are leading the way higher today with a 1.4% gain.  Over the past week, the FTSE-MIB is up 4.4%, the most among not just major European markets but the G7 as well by a couple of magnitudes.  

Monte Paschi successfully swapped about 20% of its subordinated notes for equity.  The next step is to secure new capital by anchor investors, like Qatar.  After that is the challenge of raising capital by issuing more stock.  There is some risk that even if it can do this, which is not sure thing (which is also why there is still talk of precautionary state aid), it may satiate the market for this type of risk asset even though other large Italian banks are also looking to raise capital.   There is also some talk that the bank may move away from its non-performing loan disposal, which might not sit well with potential investors.  

German news offered a pleasant surprise....