Overview: The failure of the S&P 500 to sustain even modest upside momentum yesterday is keeping traders on edge today, though another attempt on the upside is likely. Asian equities were mixed, with Chinese and Japanese shares lower. The Nikkei closed below the 21000 support level. European shares are struggling to hold on it early gains, though Italy's stocks and bonds have surged on reports of an agreement with the EU. The Bank of Japan and the Bank of England meet tomorrow, but neither is expected to change policy. That leaves today's FOMC meeting as the last big event of the year. The US dollar is trading heavily across the board amid market anticipation of dovish signals today.
Asia Pacific
Japan reported a larger than expected November trade deficit. The JPY737.3 bln deficit compares with a JPY450 bln deficit in October and forecasts for a JPY630 bln shortfall. Exports dried up, eking out a 0.1% gain from a year ago, down from 8.2% growth in October. Imports slowed to 12.5% from nearly 20% in October. To put the numbers in perspective, consider that over the past 12-months, Japan has reported an average monthly deficit of JPY65.6 bln. Last November the 12-month average was a JPY265.6 bln surplus. Japan's current account surplus, like Switzerland's, is driven by the investment income account, not the trade balance. Exports to the US rose 1.6% and 3.9% to Europe. However, exports to China slowed to 0.4%. However, the volume of exports to China fell 5.8%, while overall export volumes fell (1.9%) for the second decline in three months.
China's annual economic policy meeting continues, and it is here where new initiatives may be announced. Many observers bemoaned the fact that President Xi speech did not contain new stimulative measures. However, a speech to celebrate the 40th anniversary of the Deng Xiaoping reforms and the economic modernization of China is not the place to look for proposals on how to fix or reform that modernization. Reports suggest that the US and Chinese officials will resume their face-to-face trade talks next month.
The dollar slipped to a marginal new low below JPY112.20, for the first time since late October, when it traded near JPY111.30. Since then the greenback has been mostly in a JPY112.25-JPY114.00 range. There are almost $1.5 bln in JPY112.40-50 options that expire today several hours ahead of the outcome of the FOMC meeting. The Chinese yuan remains in tighter ranges that one would expect given the movement of other currencies against the dollar. The Australian dollar toyed with the $0.7200 level that had previously been support and now serves as resistance. The Aussie seems comfortable in around a 25-tick range on either side of it.
Europe
As the year winds down, the nationalist/populist government in Italy appears to have reached an agreement with the EU over next year's budget. The details are not yet fully known, but it seems that some compromises have been made on both sides. Italian bonds and stocks have rallied strongly. The 10-year yield is off nearly nine basis points to 2.85%. The yield peaked almost 100 bp higher n mid-October. It was nearer 1.80% before the spring elections. The premium over Germany was less than 120 bp then before topping in October near 325 bp. Today it is slipping below 260 bp for the first time since September. Bank stocks have rallied strongly(3%+), but the volatility is such that, the bank share index has surged more than 3% in at least one session in each of the past three weeks as well. The challenges Italy faces have not gone away. The agreement with the EU ensures the problem is chronic rather than acute. With a budget agreement, which is still making its way through the Italian parliament, the next focus is likely politics with jockeying for position ahead of the EU Parliament elections next spring...
...MORE
