Big Moves, But Markets Trying To Stabilize

The markets have been subject to large moves in recent days. Some, including those involving the dollar, were counter-trend moves. Some, like oil, were accelerations of the existing trends. There have been a number of surprise developments today, including the less dovish Reserve Bank of New Zealand and the 25 bp cut from Norway's central bank. The markets are trying to stabilize, and the dollar's correction appears to have exhausted itself.

The euro had already peaked just shy of $1.25 before the ECB's announcement on the TLTRO and came off further on the news. The euro recorded the session low near $1.2415 shortly after the announcement.

Banks borrowed about 130 bln euros from the ECB under this facility. It was more than the first TLTRO, but less than half what was available. It underscores how far away the ECB is from achieving its intention of driving its balance sheet up by a trillion euros. Peripheral European bonds were recovering from this week's slides. The modest participation kept bonds firm, though Greek bonds remain under pressure. Samaras's gambit to bring forward the presidential selection process means raising the political concerns. Thus far, there is little contagion.

This is thought achievable only in an asset purchase program that would include sovereign bond purchases, which is extremely controversial; raising political, legal and operational challenges. Note that about a week before the next ECB meeting, the European Court of Justice is to hand down a non-binding ruling on the legality of the OMT program.

However, more immediately, attention will turn to the US consumer as the November retail sales are reported. The market will look past any softness in the headline that might be restrained by the drop in gasoline prices. The component that excludes autos, gasoline, and building materials is used for GDP calculation and should be firm. The 12 and 24-month averages are 0.3%. The US may report its second consecutive 0.5% monthly increase and the third in four months.

Norway's central bank 25 bp rate cut to 1.25% is the main surprise of the day. It sent the krone about 1% lower against the euro. The Norges Bank cut its forecast for the non-oil economy to 1.5% from 2.25% in September. It now sees rates remaining steady or lower until the end of 2016. This leaves the door open to another rate cut if needed.

The Reserve Bank of New Zealand produced its own surprise. While not changing rates, the statement was more hawkish than expected, warning that a further increase in the official cash rate may be required at a later stage. It sees output exceeding capacity. The market had been leaning to a rate hike in late 2015. The New Zealand dollar, which officials continue to regard as over-valued, extended its three-day rally to near $0.7870 after setting the low for the year near $0.7600 on December 9. However, it ran out of steam and returned toward $0.7800. Below there support is seen near $0.7750.

News that Australia’s unemployment rate ticked up to 6.3%, a new 12-year high, heightened speculation that the Reserve Bank of Australia will cut rates early next year. The details from the employment report were dour even though the headline of 42.7k jobs created topped expectations. It was nearly all part-time jobs. There were only 1.8k new full-time positions, and the number of full-time jobs reported in October were revised down to 27k from 33.4k.

Japan’s Q3 GDP was unexpected, revised to show a deeper contraction, and Q4 is not off to a strong start. Earlier today Japan reported a 0.2% decline in its tertiary industry index and machine orders, which had been expected to fall by 1.7% instead plunged by 6.4%.

In its weekly portfolio flow report, the MOF showed that Japanese investors took profits on foreign bonds. It is the third consecutive week that Japanese investors did not buy foreign bonds (last week it bought JPY100 mln, which is really nothing for this time series). Japanese buying of foreign stocks has also slowed considerably. Consider than the four-week moving average was above JPY200 bln from late September through the end of October (when the GPIF announcement was made). It now stands at less than JPY100 bln.

The dollar’s recent drop against the yen was extended to slightly below JPY117.50 in early Asia. It has since recovered to approach JPY119.00. Support now is pegged near JPY118.50. Recall that on December 14, Japan goes to the polls and is widely expected to result in Abe’s coalition holding on to its super-majority in parliament. Initially it had looked like the governing coalition would lose seats, but the opposition has failed to impress. It has not offered an alternative to Abenomics, which is not very popular in Japan. Late in the day, the BOJ will report the results of its Tankan survey.