From Marc to Market:
Overview: Iran's Ayatollah Ali Khamenei has threatened "severe retaliation" for the US attacked that killed an important head of a force within the Islamic Revolutionary Guard. At the same time, reports indicate that North Korea's Kim Jong Un is no longer pledging to halt its nuclear weapons testing and has threatened to unveil a new weapon. Meanwhile, Turkish forces have reportedly entered Libya. The geopolitical tensions are the key development that is hitting thin holiday markets and sapping the risk appetite that led to new record highs in the US equities yesterday. Asia Pacific equities were narrowly mixed, while Europe's Dow Jones Stoxx 600 is giving back yesterday's gain, and the US shares are trading heavily, with the S&P 500 looking around 1.5% lower. The US 10-year yield eased four basis points yesterday and is off another six today to 1.81%. European benchmarks are off 5-7 basis points. The US dollar has extended its recovery against most of the major currencies. The yen is a notable exception that the absence of local markets may have exaggerated the saw the dollar slip below JPY108 for the first time in two months. After rallying for eight consecutive sessions, the JP Morgan Emerging Market Currency Index fell yesterday and is extending its pullback today. It is at one and half week lows today. Oil shot up as investors fear disruptions. February WTI surged 3.5% to almost $64 a barrel where it peaked last April. Gold also approached last year's high (~$1550). It has risen every session this week.....MUCH MORE
Asia Pacific
The PBOC set the dollar's reference rate at CNY6.9681 today. The bank models average was about CNY6.9668. There does not appear to be any signal of a policy change following the announced cut in reserve requirements that go into effect on Monday and amid expectations for further easing of financial conditions ahead of the Lunar New Year toward the end of the month. Separately, but not unrelated, China has rebased the basket its uses (CFETS, the China Foreign Exchange Trade System) to monitor the yuan from 2015 trade flows to 2018. The net effect is to reduce the dollar's weight to 21.59% to 22.40%. The euro's share rose to 17.40% from 16.34%, and the Hong Kong dollar's share was shaved to 3.57% from 4.28%. Given the HK dollar's peg to the US dollar, reducing its share is also reducing the greenback's impact. The CFETS weightings are used by economists to estimate where the dollar reference rate will be set. The effect is seen as minor.
The thin market conditions (remember last year's flash crash?) and the geopolitical news gave the yen a shove higher. The dollar found support in late Asia/early Europe near JPY107.90. It briefly traded a bit lower in early November. The markets frequently seem to exaggerate geopolitical risks. Initial resistance is seen near JPY108.20. There are nearly $1.8 bln in options struck in the JPY108.50-JPY108.56 area that expire today. The Australian dollar peaked on New Year's Eve near $0.7030 and has been beaten back to about $0.6935 today. The $0.6925 area corresponds to a (38.2%) retracement of last month's gains, and the 20-day moving average is a bit lower (~$0.6915). The disastrous wildfires are thought to bring forward fiscal support, but the economic consequences are still be worked through.
Europe
Next week, the EMU's first estimate of December CPI will be reported. We see the base effect and higher oil prices as spurring an inflation scare, and we suspect it has already begun and will continue through February. The November 2018 CPI fell 0.6% while the November 2019 report eased 0.3%. In December 2019, eurozone's CPI was flat, and a small increase will boost the year-over-year reading its highest level since last April (1.7%).
France reported December's CPI today. It rose 0.5% for a 1.6% year-over-year pace. This followed a 0.1% increase in November and a 1.2% year-over-year rate. German states are reporting, and shortly, the national estimate will be available. The EMU harmonized calculation may see a 0.5-0.6%% increase that would lift the year-over-year reading to 1.4%-1.5% after 1.2% in November....
