Friday, January 29, 2021

Capital Markets: "Please Stay Seated, the Ride is not Over"

 One of Mr. Chandler's best headlines of the year.

From Marc to Market:

Overview: Powerful corrective forces continue to grip the market. After a large rally to start the New Year, the correction is punishing. Most Asia Pacific equities markets were off again today to bring the week's loss to 2.5% to 5.5% throughout the region. Europe's Dow Jones Stoxx 600 is a little more than 1% lower on the day. The 2.4% loss for the week would be the largest since October and wipes out the month's gain. US shares are trading heavily, and the S&P futures point to around a 1% drop, which is marginally lower for the year. Bond markets are not drawing a safe-haven bid, and yields are mostly 2-4 bp higher. Italian bonds are performing best as the market anticipates some kind of resolution to the political turmoil without resort to disruptive and distracting elections. The 10-year US Treasury yield is about 1.07%, a four basis point increase on the week. Only the Norwegian krone is stronger against the dollar today among the major currencies. Of note, despite risk-off, the weakest of the major currencies today are the Australian dollar and Japanese yen, off around 0.5%. Emerging market currencies are mixed, and the JP Morgan Emerging Market Currency Index is up a little today but is still off about 0.25% for the week. If sustained, it would be the sixth consecutive weekly decline. Gold is firm but continues to consolidate around $1850 (200-day moving average). Silver has reportedly drawn interest from the swarm of retail investors. The metal was up nearly 5% yesterday and is up nearly another 1% today. Near $27.10, silver at three-week highs. March WTI is little changed and is in the lower end of its recent consolidative range ($52-$54).

Asia Pacific
Japan's economy finished 2020 on a weak note.
Retail sales fell by 0.8% in December, a little more than expected, and follows a 2.1% decline in November. Industrial output tumbled 1.6% in December for a 3.2% year-over-year contraction. Unemployment was unchanged at 2.9%. The preliminary PMIs show economic activity is still contracting, and areas that account for around 60% of GDP are in a formal state of emergency. The BOJ does not meet until March. Talk that it would pull back from its ETF buying has been dampened by the recent volatility, while some speculate that officials could tolerate a wider range for the 10-year yield.

South Korea and Taiwan data points point to a regional recovery, despite Japanese woes.
Seoul reported a 3.7% jump in December industrial output, a multiple of what was expected. Taipei reported Q4 GDP rose 4.9% year-over-year, making it one of the few economies to expand in 2020. Over the weekend, China's PMI will be released, and a little softening is expected within the expansion.

The Japanese yen's safe-haven appeal always seemed more complicated to us than "buy yen when there is trouble". We often saw it linked to unwinding its funding role (borrowed and sold to finance the purchase of higher beta assets, and when those assets go south, which they invariably do, the trade is unwound the funding currency has to be bought back too). Despite the dramatic equity reversal, the yen is at its weakest level against the dollar since mid-November. The greenback has risen more than 0.5% against the yen today, its third consecutive advancing session. It appears that participants turned more cautious as the JPY105-level came into view. Three-month implied volatility is firm just below 6%, which is still soft. The 100-day average is closer to 6.8%. We suspect the spot move today is exhausted or nearly so. Support now is seen in the JPY104.40-JPY104.60 area....