Friday, January 28, 2022

Capital Markets: "Dollar Rides High"

From Marc to Market:

Overview: The more hawkish turn by the Federal Reserve continues to ripple through the capital markets. Equity markets are struggling to stabilize. Apple's earnings help its shares and ecosystem stabilize. The MSCI Asia Pacific Index pared with week's losses helped by 2%+ gains in the Nikkei and Australia. Strong industrial production figures helped Korea's Kospi. It pared its weekly loss to 6%, the most in the region. All the sectors are trading lower in Europe's Stoxx 600 today as the finishing touches are put on the fourth consecutive weekly decline. It is off around 1.5% near midday. US futures are narrowly mixed, with the NASDAQ faring best. Benchmark 10-year yields are firm in Europe and the US. European yields are 2-4 bp higher, and we note that for the week, the Italian premium over Germany narrowed is virutally unchanged with the basis point widening today. The US 10-year yield is 1.83%-1.84% The 10-year JGB yield rose to 0.165%, testing the last couple years' high. It has not been above 0.20% since 2016. Foreign investors sold the most Japanese bonds last week since last September. The Scandis and dollar bloc are bearing the brunt of the greenback's broad strength today. The dollar's weekly gain ranges from around 1% against Norway to 2.7% against Sweden. Most emerging market currencies are lower too. Of note, today India, Russia and China are seeing small gains against the dollar. The JP Morgan Emerging Market Currency Index is snapping a three-week advance. 
Rising yields is sapping the appeal of gold. It tested $1850 earlier this week and is now near $1786. It looks set to test the month's low a little below $1783. March WTI is quiet as it puts the finishing touches on its sixth consecutive weekly advance. US natural gas went on a wild ride yesterday. A powerful short squeeze saw the expiring February contract rise by over 70% yesterday. The generic contract was up almost 46.5%, while it is off almost 30% today. Net-net, it is up around 11% for the week. Europe's benchmark 2.5% higher on the day, which brings the weekly gain to about 17.5%. Iron ore prices were virtually flat on the week before today's 6% advance. Copper prices are heavy and now breaking below the 200-day moving average ($438).

Asia Pacific
Mainland Chinese markets will be closed next week for the Lunar New Year celebration.
Over the weekend, the January PMI and Caixin manufacturing PMI will be reported, and are expected to have softened. The lockdowns are taking a toll. Recall that China reported stronger than expected growth in Q4 21 (1.6% vs. 1.2% expected and 0.2% in Q3). Still, it is clear that officials are pushing different levers to induce stronger growth. Separately, China approved AMD's $35 bln acquisition of Xilinx. It won regulatory approval in the US and Europe. China has rejected the last big chip merger a few years ago. Tokyo's January CPI was a little disappointing. The headline pace slowed to 0.5% from 0.8% year-over-year. The core measure, which excludes fresh food, slowed to 0.2% from 0.5% year. The deflationary thrust can be seen when fresh food and energy are excluded. This measure stands at -0.7%, matching last year's low point, which was the lowest since 2013. One key development will come in the few months when last year's cut in mobile phone fees drop out of the 12-month comparison....