A return of risk appetites can be seen through the capital markets today, arguably encouraged ideas that Omicron is manageable and China's stimulus. Led by Hong Kong and Japan, the MSCI Asia Pacific rose by the most in three months, while Europe's Stoxx 600 gapped higher, leaving a potentially bullish island bottom in its wake. US futures pointed to a gap higher opening when the local session began.
The bond market was taking it in stride. The US 10-year Treasury was slightly firmer at 1.44%, while European yields were 1-3 bp higher. The dollar-bloc currencies and Norway were leading the move higher among most major currencies. The yen and euro were softer. Sterling struggled to sustain upticks.
Among emerging markets currencies, the Turkish lira was bouncing, while most central European currencies were being dragged lower by the weaker euros. The JP Morgan Emerging Market Currency Index was slightly higher after four consecutive losses.
Gold was trading within yesterday's narrow range. Oil continued to recover, and the January WTI contract up around 2.5% (after yesterday's 4.9% advance) and above $71.50 a barrel. US natgas prices dropped 11.5% yesterday and came back firmer today, while the European benchmark (Dutch) was up 7% today (~+0.5% yesterday) to near last week's highs. Iron ore prices jumped 7.7% today after 2.5% yesterday, perhaps encouraged by strong Chinese import figures. Copper prices were also firm.
Asia Pacific
The Reserve Bank of Australia stuck to its stance. It may take two years to reach the 2-3% inflation target, and the uncertainties surrounding the Omicron variant also favored a cautious approach. This was in line with expectations. The swaps market still had about 75 bp of higher rates discounted next year. The Australian dollar's gains reflected the risk-on mood.
Japan's economy was on the mend. Household spending rose 3.4% month-over-month in October. Paradoxically, outlays on medical care actually fell (-5.7%) year-over-year in October. Meanwhile, Labor cash earnings rose by 0.2% year-over-year, the same as in September, but less than expected. Households headed by a worker rose 0.5% year-over-year.
China's trade surplus fell to $71.7 bln in November from $84.5 bln in October. The US accounted for a little more than 50% of the surplus (~$37 bln). Exports rose by 22% year-over-year, less than the 27.1% increase in October. But, what really stood out were China's imports. They surged, jumping 31.7% from a year ago after a 20.6% increase in October.
Commodity imports were robust. The 35 mln tons of coal imported was the most this year. Oil imports were at three-month highs. Iron ore imports reached a 13-month high, Gas purchases were the highest since January. Copper imports appear to be a record. Separately, China reported that the value of its foreign exchange reserves rose by a minor $4.7 bln to $3.222 trillion. Economists (Bloomberg survey median) had expected around an $11 bln decline.
The dollar forged what appeared to be a solid base around JPY112.55. So far, today was the first session since Nov. 26 that the greenback has held above JPY113.00. It was confined to a narrow range between JPY113.40 and JPY113.75. The dollar looked poised to move higher but may stall around JPY114.00, where an option for around $865 mln expires today.
The Australian dollar rose about half of a cent yesterday and was up around another half-cent today to test $0.7100. An option for A$1.04 bln expires today there ($0.7100). It was also the (61.8%) retracement objective of last week's drop. A move above there would target the $0.7130 area and possibly $0.7200.
The reduction in Chinese banks' reserve requirements and the divergence with the direction the Fed appeared headed did not deter the yuan from strengthening. The dollar held CNY6.38 yesterday and was near CNY6.3660 today. The low for the year was set at the end of May near CNY6.3570. The dollar's reference rate was set at CNY6.3738, a touch higher than the models (Bloomberg survey) projected of CNY6.3734.
Europe
According to the proverb, for want of a nail, a kingdom was lost. US intelligence warned that Russia was poised to invade Ukraine. Beijing continued to act as a bully in the South China Sea. US President Biden will be hosting a "Summit for Democracy" Dec. 9-10. Reportedly 110 countries will be represented, even Taiwan, which the US officially does not recognize as a country.
All of the EU members have been invited but Hungary. Hungary, like Poland, is in a serious fight with the EC over the rule of law. It is being fined for failing to comply with the European Court of Justice over its harsh treatment of asylum seekers. Poland, which is invited to the summit, is also being fined a record 1 mln euros a day for deviations from the EU standards of the rule of law. Yet Hungary's exclusion is needlessly antagonistic. Hungary will hold parliamentary elections in April (though possibly May), and the opposition is united behind the center-right Marki-Zay. Most polls show him ahead of Orban.
It was an insult to the EU, and Orban used his veto to block the EU from formally participating and prevented it from submitting a position paper. It is a vulnerable position for the US to be the judge and jury about democracy and the rule of law. Laura Thorton, director of the Alliance for Securing Democracy of the German Marshall Fund of the United States, expressed shock and dismay in a recent Washington Post op-ed over developments in Wisconsin.
She wrote,
"If this [where the GOP is seeking to replace the bipartisan oversight of elections with just its party's control] occurred in any of the countries where the US provides aid, it would immediately be called out as a threat to democracy. US diplomats would be writing furious cables, and decision makers would be threatening to cut off the flow of assistance."
Separately, the US embassy in Tokyo warned Japan about "racially profiling incidents" following the closure of its borders to new foreign entries into the country.
The US response to the Russian aggression in Georgia in 2008 and the annexation of Crimea in 2014 was soft. Despite bringing NATO to Russia's door in the Baltics, the US recognized by its actions that it was difficult to defend what Russia called its near-abroad. Ukraine is different.
When Ukraine gave up its nuclear weapons, the Budapest Memorandum (1994), Russia, the US, and the UK committed to respecting its independence and territorial integrity. Russia clearly violated the agreement, but the US said it was not legally binding.
Nevertheless, reports indicated that the Biden administration was contemplating new sanctions against Russia and Putin's inner circle. Reportedly under consideration was removing Russia from the SWIFT payment system and new sanctions of Russia's energy companies, banks, and sovereign debt.
In late April, the European Parliament approved a non-binding resolution to exclude Russia from the SWIFT if it attacked Ukraine. Russia has been a heavy user of SWIFT, as few foreign banks, including the Chinese, have been willing to use Russia's own payment system.
After a dismal factory orders report, the market was prepared for a poor industrial output report today. Instead, Germany surprised with its strongest gain for the year. Industrial output surged 2.8% in October. It was only the third monthly gain this year. Moreover, September's decline of 1.1% was halved to 0.5%.
It appeared auto production (capital goods) may have been behind the improvement in activity. Separately, the ZEW survey was mixed. The expectations component was stronger than expected, but still, at 29.9, lower than November's 31.7 reading. The assessment of the current situation deteriorated sharply to -7.4 from 12.5. It was declining since September, but this was the lowest since June.
On Nov. 30, the euro spiked higher and subsequently worked its way lower. Today, it reached almost $1.1250, its lowest level since Nov. 30, low near $1.1235. The 20-day moving average (~$1.1320) continued to block the upside. It had not closed above it for a little more than a month. The low for the year so far was recorded on Nov. 24 near $1.1185.
For its part, sterling remained in its trough. The low for the year was set on Nov. 30, slightly below $1.32. Before the weekend, it was in a roughly $1.3210-$1.3310 range and remained well within that range yesterday and today. It was blocked ahead of $1.3300. There was an option for about GBP450 mln at $1.3250 that expires today.
America
The US is expected to report that productivity fell in Q3 by 4.9% rather than the 5% that was initially reported. Productivity increased by 2.4% in Q2 and 4.3% in Q1. It averaged 2.6% last year and 2.3% in 2019. Unit labor costs were the most holistic measure, including wages, benefits, and output. Looking at a four-quarter moving average, unit labor costs rose 1.6% in 2018 and 1.45% in 2019. They jumped to 6.25% last year and fell by an average of 0.85% in H1 21. The initial estimate for Q3 was an 8.3% surge.
The US also reports the October trade balance. The preliminary goods balance signaled a likely improvement from the $80.9 bln deficit in September. The median forecast (Bloomberg) saw a deficit of slightly less than $67 bln. Through September, the monthly average was nearly $71 bln, up from $53.3 bln in the same period last year and less than a $50 bln average in the first nine months of 2019.
Late in the session, the US reports October consumer credit, and another substantial increase is expected. It jumped almost $30 bln in September. It has averaged $20.275 bln a month through September. Last year was too distorted, but in the first three quarters of 2019, consumer credit rose by an average of $15.3 bln a month.
Canada is to report its October merchandise trade figures today, ahead of the Bank of Canada meeting tomorrow The median forecast in Bloomberg's survey called for a C$2.08 bln surplus, which, if accurate, would be third largest surplus since 2008. The June surplus was larger at C$2.26, as was the December 2011 surplus of C$2.12 bln.
Canada's goods trade balance through September swung into surplus with an average of C$703 mln. In the same period in 2020, the monthly deficit averaged C$3.1 bln and C$1.4 bln in 2019. The merchandise surplus may be sufficient to lift the current account too. Canada has been running a current account deficit since 2009. The OECD forecasted a surplus this year of 0.3% of GDP and projected it to be in balance next year.
Canada and Mexico have expressed concerns about the credits for electric vehicles in the Build Back Better US initiative. They claim it violates the USMCA. Europe expressed similar problems, and the EU Trade Commissioner Dombrovskis reportedly sent a formal letter warning that the Biden administration's efforts may also violate WTO rules.
Meanwhile, there was talk that the initiative may be blocked this year. If that will be the case, the odds of passage next year seemed even slimmer. On a different front, Mexico's controversial energy reforms, which expand the state sector, over some objections by US energy companies, looked to be delayed due to lack of support.
The US dollar posted an outside up day against the Canadian dollar before the weekend, despite Canada's strong employment report. There was no follow-through yesterday, and the greenback recorded an inside day and settled on its lows. The US dollar was sold to around CAD1.2700 today. Initial support was around CAD1.2675, but the more significant test was near CAD1.2640. A break would strengthen the conviction that a high was in place.
Meanwhile, the greenback continued to consolidate against the Mexican peso. It remained within the range set last Wednesday (~MXN21.1180-MXN21.5150). Thus far today, it was holding above yesterday's low (~MXN21.1720), which was above the pre-weekend low (~MXN21.1625).