A Rare Dollar U-Turn, but Persistent Themes Remain Intact

What can’t go up forever apparently will not and today has seen a couple violent moves.  The buck, which has risen by more than 10% against the yen since the BOJ shocked with a 5-4 vote to speed up its already aggressive financial easing on October Thirty-one, rose to new multi-year levels yesterday just shy of JPY122 only to sell off to almost JPY119.50 today.  

There was not a fundamental trigger, though the sell-off in global collateral markets may have encouraged the actual some profit taking.  A lot of the pressure, however, appeared to originate from crosses, especially the dollar-bloc.  A poor business confidence survey saw the Australian dollar fall to $0.8225, fueling more calls for rate cuts next year.

Chinese stocks also staged a dramatic reversal.  The Shanghai Composite, which extended it’s recent moon-shot initially by tacking on another 3% to bring the gains since last November’s surprise price cut to nearly 27%, reversed dramatically to close 5.4% lower at the time.  A 7.5% drop in financials, and almost as large the drop in the energy sector brought it.  Regulators have been caution about investors getting ahead of themselves in recent days.  Earlier today, regulators stiffened collateral rules for collateral margin.  AA rated ties or lower can no longer end up being collateral to buy stocks.  This particular effectively drained liquidity, though the PBOC itself refrained from open marketplace operations. 

The yuan sold off sharply.  It’s declined 1% since the end associated with last week.  The dollar arrived at CNY6.2080 today, the highest level since July.  The recent low had been set at the end of October close to CNY6.1080.  China reports inflation and lending figures tomorrow.  Blocking a significant surprise, many individuals will continue to look for a near-term decline in the reserve requirements. 

Ideas the UK economy was taking pleasure in new momentum late around were stopped cold through disappointing industrial production as well as manufacturing data.  Expectations had been for October industrial production and manufacturing to have each risen by 0.2%.   Recall the October manufacturing PMI flower to 53.3 in October from 51.Six in September.  Today the united kingdom reported industrial output dropped by 0.1% while production output slumped 0.7%.  The implied yield of the December 2015 short-sterling contract is nearly 10 bp higher than yesterday.  UK gilts tend to be outperforming. 

Separately, BRC sales were stronger within November rising 2.2% year-over-year following a 1.4% increase in October.  Like-for-like increased 0.9% after a flat Oct.  Also, MPC member Weale, who has favored an immediate hike in prices, reiterated his hawkish stance.  Another dissenting hawk McCafferty speaks Thursday.  

Greek bonds will also be staging a dramatic reversal today.  Ten-year bonds yields had contacted 8.5% in late November, however by the end of last week, yields experienced slumped to near 7.15%.  The actual yield has jumped back toward 7.70% today.  Greek stocks have slumped more than 8%, led by financials (-11%).  The actual trigger was Prime Minister Samaras’ decision to bring forward the selection of the following Greek president.  Opposition parties will try to prevent Samaras from gaining the sufficient super-majority needed to achieve this, and this would force elections earlier next year.  Syriza, which is anti-austerity, and most lately pressing for official sector investor haircuts, is operating ahead in the polls.  The January election, for example, might influence the ECB to wait until its March meeting to declare a wider asset purchase plan.  It could be an awkward time for you to buy Greek bonds, to say the least.   

The Federal Reserve’s Labor Marketplace Conditions Index deteriorated within November (2.9 versus 3.9).  Today’s Bumps report is to follow.  It is not a market mover, and it will stand in the way of rising confidence of the first Fed hike the coming year.  The immediate focus is on next week’s FOMC statement, where there is growing speculation that the Fed drops or changes “considerable period”.  In fairness, many thought this was possibly at the last meeting, but it is now recognized that the importance of the Fed press conference to help clarify and guide expectations.  This is why the first rate backpack is also at a meeting by which Yellen holds a press meeting.

A Day of Reversals is republished with authorization from Marc to Market