Monday, December 30, 2019

Capital Markets: "The Greenback Remains Soggy, while China and Turkey Move in Opposite Directions"

From Marc to Market:
Overview: In quiet turnover, Asia Pacific and European equities are trading lower, while US shares are enjoying a firmer bias. China and Hong Kong markets bucked the trend. The Dow Jones Stoxx 600 is off by about 0.40% in late morning turnover. The S&P 500 has a five-week rally in tow. Bond yields are mostly 2-4 basis points higher in Europe, though the 10-year Gilt yield is up 6 bp to 81 bp. The 10-year US Treasury is pushing above 1.90%. The dollar is on its back foot after slipping against nearly all the major currencies last week. The euro poked above $1.12 for the first time since August. The JP Morgan Emerging Markets Currency Index is extending its rally into a sixth session, the longest run in five months. The South African rand is a notable exception, falling about 0.25% against the greenback. After slipping ahead of the weekend, gold is pushing higher again. It is near $1515. It finished last month, below $1465. Oil is firm with February WTI hovering just below $62 a barrel.

Asia Pacific
Over the weekend, the PBOC announced that it was pushing ahead
with boosting the significance of the loan prime rate (LPR). Starting next month, new variable rate loans will no longer use the one-year lending rate but the LPR. In itself, this is not so important, as this has reportedly primarily been the case in recent months. More suggestive is that from March to August next year, the existing stock of loans will be converted to the LPR. However, the change may not result in lower rates for residential mortgages, for whom officials do not want to overly encouraging. Mortgage lending appears to account for about 25% of the CNY157 trillion of outstanding bank loans. The one-year LPR is set monthly based on one-year lending rates offered by 18 banks to their best customers, and in this respect, may be seen as a step toward liberalization, but we would not want to exaggerate this. It is at 4.15%, 20 bp below the one-year lending rate (which has been at 4.35% for four years) and is an ease on the margin, but it seems more about solidifying the role of the LPR.

South Korea reported disappointing November industrial output. It fell 0.5% on the month, compared with a flat report expected by the median forecast in the Bloomberg survey. It was the third monthly decline in the past four. The year-over-year decline moderated to -0.3% after a revised -2.1% contraction in October (initially was -2.5%).

Japanese markets will be closed for the rest of the week. The dollar had been meeting a wall of offers in the JPY109.70 area this month and as recently as Boxing Day. In the thin activity, it broke down to almost JPY109 in Asia and steadied in the quiet European morning. Initial resistance is now pegged in the JPY109.20-JPY109.30 area. More important support is seen in the JPY108.40-JPY108.70 area. The Australian dollar is testing the $0.7000-level for the first time in five months. The intraday technical readings are stretched, and the upper Bollinger Band is found near $0.6985. The Chinese yuan firmed on the back of the broadly weaker greenback. The dollar is new two-week lows near CNY6.9865.