Friday, January 22, 2021

Capital Markets: "Faltering Friday"

 From Marc to Market:

Overview: Fear that social restrictions may have to be broadened and extended is helping spur a wave of profit-taking and de-risking, which has also been encouraged by disappointingly high-frequency data. The equity rally seemed to falter a bit in the US, as the S&P 500 eked out a minor 0.03% gain yesterday. In the Asia Pacific region, Hong Kong shares, which had been the high-flyers this week, got hit the hardest today, falling by 1.6% (still up 3% on the week), while India and several smaller bourses also fell by more than 1%. On the back of soft preliminary PMIs, Europe's Dow Jones Stoxx 600 is off 1% to give back this week's gains. 

The S&P 500 is up 2.25% on the week coming into today, and the benchmark is trading about 0.75% lower. The US 10-year is slightly lower, around 1.09%, while most European bond yields are softer, but Italy and Greece. Australia and New Zealand yields jumped 5-6 bp. The dollar is mostly higher against the major and emerging market currencies. Those currencies that were the better performers this week, like sterling, the Australian and Canadian dollar, and the Norwegian krone, are leading to the downside today. The JP Morgan Emerging Market Currency Index is off for the second consecutive session. Recall that it had fallen for the past four straight weeks. With the 0.2% decline today, it is holding on to about a 0.35% gain on the week. Gold's recovery from the test on $1800 at the start of the week stalled yesterday near $1875, and it is trading nearly $30 off its peak in the European morning. March WTI failed in the middle of the week to rise above $54 and eased a little yesterday (~-0.35%) but has come under stronger selling pressure today, ostensibly on demand worries. Near $51.80, it is off around 1.2% on the week, which would snap a three-week, nearly $5 advance.

Asia Pacific
Japan reported both December CPI and the preliminary January PMI. Note too that press accounts suggest the Suga government is on the verge of concluding that the summer Olympics need to be canceled.
Japan is still gripped by deflationary forces. Headline CPI stands at -1.2% after -0.9% in November. The core rate, which excludes fresh food, is at -1.1% (-0.9% in November). Even if fresh food and energy are removed, Japan's deflationary conditions remain (-0.4%). The preliminary PMI shows the difficult straits the third-largest economy is facing. The manufacturing PMI slipped to 49.7 from 50.0. The service sector contraction deepened (45.7 vs. 47.7), pushing the composite to 46.7 (from 48.5).

Australia's economy is holding up better. The manufacturing PMI rose to 57.2 from 55.7, though the service PMI softened to 55.8 from 57.0. The composite was shaved to 56.0 from 56.6. Australia also reported a disappointingly large decline in December retail sales. The economists surveyed by Bloomberg expected a 1.5% decline. Instead, the preliminary estimate points to a 4.2% decline, denting November's 7.1% gain. Separately, news that New Zealand's inflation was firmer than expected (unchanged at 1.4% in Q4 20 rather than easing to 1.1%) may deter the central bank from fresh measures.

China is threatening to strike out at Sweden for blocking Huawei and ZTE from its 5G rollout. While Sweden would not be the first to be subject to Beijing's wrath, it seems ill-advised. The EU and China struck an investment deal after several years of negotiations at the end of last year. The approval process is not complete. China's actions could put the treaty at risk....