Overview: The US dollar is little firmer against most of the major currencies. Despite some disappointing data (retail sales, trade, PMI), the Australian dollar has recovered from initial losses below $0.7200 on the back of the central bank's reluctance to adopt an easing bias. A small upward revision in the eurozone's flash service and composite PMIs help steady the euro after it neared $1.14. Most Asian markets remain closed for the Lunar New Year, but the Topix (though not the Nikkei) Australia, Hong Kong, and India edged higher. European shares are firm, with the Dow Jones Stoxx 600 extending its gains for the sixth consecutive session, led by energy and financials. Yesterday's the S&P 500 extended its gains for the fourth session. Benchmark 10-year yields are mostly a little firmer, though Portugal (the favorite of many) and Italy are bucking the trend.
Asia Pacific
There is one main story from the region today, and it is Australia. The Reserve Bank met and did not gratify some market calls that it adopt a less hawkish stance. The RBA is sensitive to the link between housing and consumption, but not sufficiently, apparently, to elicit a policy response. The link was evident in the disappointing retail sales. They were expected to be flat in December and instead fell 0.4% after the November series was revised to 0.5% from 0.4%. The January composite PMI was revised to 51.3 from 51.5 (flash). It averaged 53.6 in 2018. Australia also reported a sharp widening in the trade deficit from a revised A$2.26 bln shortfall in November to A$3.68 bln in December. The somber economic readings might not explain why the market jumped. Australia's equity rally was led by financials, where investors responded well to the government's report into the banking system did not call for radical change, such a structural reform or even tighter lending practices.
The Japanese economy contracted in Q3 and appears to have recovered in Q4, but uninspiringly so. Today the January composite PMI was reported. It fell to 50.9, nearly matching last year's lows from September (50.7). It averaged 52.3 in Q4 18 and 51.5 in Q3. Japan's Q4 GDP will be published next week. After a 0.6% contraction in Q3, it is expected to have expanded by 0.3%.
The Australian dollar is posting a big outside day, trading well beyond yesterday's lows and highs. It initially was pushed below $0.7200 and found support ahead of the 20-day moving average (~$0.7190) before recovering to $0.7265. Yesterday's high was near $0.7255. From a technical perspective, a close above there would be constructive. Last week's high was just shy of $0.7300, and that is the next immediate target. That said, fundamental considerations are not as supportive as the technical considerations, and we would be more inclined to take advantage of the Aussie's bounce to hedge or lighten up. Meanwhile, the dollar is confined to narrow ranges against the yen around JPY110. There is a $630 mln option struck there that expires today. Yesterday's high was about JPY110.15. Above there, resistance is likely to be seen near JPY110.30.
Europe
European PMIs were mixed but the reaction in the market is the same. Both the euro and sterling are trading lower. The Eurozone service and composite PMIs were revised higher from the flash readings. The service sector PMI rose to 51.2 from 50.8 of the flash reading to match the December report. The composite rose to 51.0 from 50.7 and 51.1 in December. To the extent that the service sector is driven by domestic considerations and the manufacturing is more about world demand, then today's PMI gives some hope that domestic conditions are stabilizing. In contrast, the UK's service PMI's fell to 50.1 from 51.2, and the composite slumped to 50.3 from 51.4. The composite is the weakest since July 2016, a month after the referendum. ...
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