Capital Markets: "Dismal Data Undercuts Sterling and Boosts Chances of a Rate Cut"

From Marc to Market:

Overview: There are two big stories today. The first is the large scale protests in Iran after the government admits to accidentally shooting down the commercial airliner amid the fog of war. The market impact seems minimal but fueling speculation that this, coupled with the economic hardship related to the US embargo, could topple the regime. Second, the UK reported that the economy unexpectedly contracted in November. With the backdrop of recent dovish commentary by a few officials, including BOE Governor Carney, sterling has suffered while UK interest rates have fallen as the market begins to price in a greater chance of easier monetary policy. With Japanese markets closed for a local holiday and the Philippines markets closed due to volcanic activity, the MSCI Asia Pacific Index rose for a third consecutive session. Korea and Hong Kong markets led with more than a 1% gain. Taiwan's Taiex gained 0.75%, led by financials and utilities following the weekend election. European shares remain firm, and the Dow Jones Stoxx 600 is hovering near record highs. US shares are trading firmer after the S&P 500 fell 0.3% at the end of last week. US and European benchmark 10-year yields are up 2-4 basis points, with UK Gilt yield falling back about three basis points. The dollar is little changed, but mostly firmer against the major currencies. Sterling and the yen are notable exceptions. Sterling is off for the fifth consecutive session and saw its lowest level (~$1.2960) since Boxing Day. The yen is also weaker as the dollar approached JPY110. Emerging market currencies are mostly edging higher against the US dollar. Gold continues to unwind its recent surge. It is lower for the third session of the past four and has been pushed below $1550 support. March WTI is stabilizing after falling for the previous four sessions.

Asia Pacific
The more things change, the more things remain the same. After a confrontational couple of years, the Trump Administration is returning to the status quo ante. For the last couple of years, Beijing has offered to step up its purchases of US goods to reduce the trade imbalance. Now the US is willing to accept its offer. China has, on its own accord, slowed, if not stopped its direct intervention in the foreign exchange market, and enacted market-opening measures on its own timetable. As part of its "do the opposite of the Obama Administration phase," the Trump Administration ended the semi-annual talks with China that had actually begun under Bush. Reports indicate that regularly scheduled talks will resume separate from the trade talks. Meanwhile, many observers did not think Beijing's actions met the definition of currency manipulation, and expect it to be lifted soon. The yuan is trading near five-month highs.

Tsai Ing-wen was easily re-elected President of Taiwan. The landslide victory may embolden the critic of Beijing's slogan of "one country, two systems." Even if China's record on human rights and personal liberty was significantly better, Taiwanese nationalism would likely remain a powerful force. Here too, the status quo has been preserved. The market has long anticipated her victory, so today's modest response is not that surprising. Taiwan's stock market was up about 23% over the past year, and the Taiwanese dollar rose 2.3% since the beginning of last year.

The dollar is at 7.5-month highs against the Japanese yen, having reached JPY109.90 in the European morning with Tokyo markets closed for a national holiday. There does not appear to be any large options struck at JPY110, but stops are thought to lie there.....

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