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Equities And Bonds Sell Off

By Marc ChandlerForexJan 18, 2022 06:15AM ET
Equities And Bonds Sell Off
By Marc Chandler   |  Jan 18, 2022 06:15AM ET
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Surging yields and plummeting equities were the main developments today. The US 10-year yield was pushed above 1.80% and the two-year yield was above 1% for the first time since February 2020. European yields were pulling back after jumping 2-5 bp.

The MSCI Asia Pacific Index was off for the fourth consecutive session. Only Shanghai among the large bourses escaped the carnage. Europe's Stoxx 600 was off around 1.1% to test last week's lows after rising 0.7% yesterday. US futures were 1.0%-1.5% lower.

The dollar was firmer against most currencies today. Among the majors, the Canadian dollar, Japanese yen, and Swiss franc were proving the most resilient as the precipitous drop in equities offset the rise in yields. The Scandis and Antipodeans were the hardest hit, off around 0.25%-0.50%. Nearly all the emerging market currencies, but the South Korean won were being sold. The Turkish lira, South African rand, and Russian ruble (~-0.6%-0.7%) were leading the move.

Don't look for gold to be much of a haven. The yellow metal was near a five-day low around $1810. Oil prices extended their rally with March WTI pushing toward $85. Recall it finished last month slightly below $75.00. US natgas was firm after falling more than 12% in the last two sessions, while European natgas (Dutch benchmark) was off about 4.5% to a three-day low. Iron ore stopped a three-day slide with a 2.6% gain, while copper was extending the loss seen in the last couple of sessions.

Asia Pacific

BOJ Governor Kuroda pushed hard against creeping speculation that the central bank was poised to adjust interest rates any time soon. There has been some talk that BOJ could raise rates well before the 2% core inflation target was met. He was clear:  "We're expecting long- and short-term policy rates to remains at the current levels or fall even lower...Raising rates is unthinkable."  Kuroda seemed to all but rule out a rate hike during his term that expires in April 2023.

As expected, the BOJ adjusted its inflation (up) and growth (down) forecasts. Inflation in the new fiscal year beginning April 1 is expected to be 1.1%, up from 0.9%. It is expected to remain there in the following fiscal year too (up from 1.0%). This fiscal year growth forecast was reduced to 2.8% from 3.4%, but next year's was lifted to 3.8% from 2.9%. However, in growth in the following fiscal year was shaved to 1.1% from 1.3%.

China's real estate market remained distressed, and dollar bonds of many developers were under pressure. There was more talk about a new infrastructure initiative. The CSI 300 Infrastructure Index rose 3.7% today, its largest rise in four months. The PBOC cut the one-year medium-term lending facility rate and the seven-day repo rate yesterday for the first time in two years. The loan prime rate is set on Thursday, and although the one-year was trimmed by five basis points last month, a cut in the five-year would ostensibly allow for lower rate mortgages.

The takeaway is the PBOC has many levers to ease policy and it is expected to use them, and this was in stark contrast with most of the countries that are tightening monetary and fiscal policies. 

With the early buying that lifted the greenback to slightly above JPY115.00, the dollar retraced half of the loss that saw it tumble from the multi-year high on Jan. 4 (~JPY116.35) to the pre-weekend low (~JPY113.50). The risk-off mood saw the dollar ease back to the JPY114.50 area in the European morning. Initial support was seen in the JPY114.20-JPY114.40 area.

The Australian dollar was trading near five-day lows below $0.7200, where a A$950 option expired today. Near-term potential extended toward $0.7155. It may take a move above $0.7230 to stabilize the tone.

The broad US dollar recovery helped Chinese officials who have made it clear that they prefer a weaker yuan. The deputy governor of the PBOC was explicit, one-way bets on the currency would not be allowed. The greenback initially fell to CNY6.3380, a new three-year low, before recovering above CNY6.35, where a $775 mln option rolled off today. The reference rate was set tightly to expectations today (CNY6.3521 vs Bloomberg survey median of CNY6.3520).


The UK employment data were stronger than expected, and the unemployment rate eased to 4.1% from 4.2%. Payrolls increased by 184k in December, well above the median forecast (Bloomberg) of 130k. The November payroll gains of 257k was revised to a still strong 162k. The unemployment claimant fell by 43.3k, after the November series was revised to show a 95k decline rather than 50k fall. Average earnings growth slowed in the three-months through November, which are reported with an additional one-month lag. The report saw the market edge up the odds of a hike at the Feb. 3 MPC meeting to a little more than 90%.

Separately, the UK political drama continued to play out. Cummings, who some suspect was the source of the leaks about the parties at 10 Downing Street, was strongly claiming that Johnson knew about the party that the Prime Minister denied. Chancellor Sunak was seen as a likely successor, and some media reports were playing up his lukewarm support for Johnson. One such report compared Sunak's recent actions with Major during Thatcher's last days.

Germany's ZEW survey showed a larger than expected improvement in expectations but a more pessimistic assessment of the current situation. Recall that at the end of last week, the federal statistics office estimated that the economy contracted by 0.5%-1.0% in Q4. The ZEW measures of expectations rose to 51.7 from 29.9. It was the highest since last July. The current situation was marked down to -10.2 from -7.4. This was the worst since last May.

Reports suggested that Europe had resisted US efforts to threaten to cut Russia off the SWIFT system if it invaded Ukraine. Apparently, to show a solid front, the US may be agreeing. Meanwhile, the UK confirmed that it will expand military aid to Ukraine to provide light anti-armor and defensive weapon systems. There may still be a reluctance to send Ukraine offensive weapons. 

The euro posted a key downside reversal before the weekend, but follow-through selling was modest. It reached a four-day low in Asia near $1.1385 and this held in the European morning. The euro has not closed below $1.14 since last Tuesday. There was an option for almost 420 mln euro at $1.1370 that expired today, while the (50%) retracement of this year's gains was slightly below $1.1380, and the next retracement (61.8%) was closer to $1.1355.

Sterling was off for the third consecutive session, the longest losing streak in over a month. It rallied more than a nickel since mid-December and faltered near the 200-day moving average (~$1.3735) last week. Initial support was seen around $1.3600. A break would confirm a high was in place and the first target may be the $1.3530 area. The euro was forging a possible rounded bottom against sterling. Today's low was about GBP0.8350, where an option for roughly 340 mln euro expired today.


The market turned more aggressive about the outlook for Fed policy. At the end of last year, the market had less than a 2-in-3 chance of a March hike. Now it has a hike fully discounted and about a 1-in-3 chance of a 50 bp move. At the end of last year, the market had almost three hikes fully discounted for this year. Now the market has about 107 bp completed priced in. 

Meanwhile, as the Beige Book warned and the preliminary University of Michigan consumer survey showed, economic confidence has waned. This may be reflected in the Empire State manufacturing survey today. On the other hand, the Philadelphia survey due Thursday is expected (Bloomberg survey) to have improved.

However, the takeaway is that after the dismal retail sales and the unexpected decline in industrial production reported last week, estimates for Q4 GDP are being reduced. The Atlanta Fed had seen the economy tracing 7.3% annualized growth in Q4 is now at 5.0%.

The US also reports November TIC data today. In October, the net inflows surged by $143 bln. The monthly average this year through October was almost $88 bln. In 2020, the average monthly portfolio capital inflow was a little less than $50 bln, and in 2019 was almost $5.5 bln. 

Canada reports December housing starts, and another strong gain is expected. However, the more important development is that the market has become more convinced that the first Bank of Canada rate hike could come as early as next week.

At the end of last year, the market had a slight leaning in favor of a Jan. 26 rate hike, but the odds have increased to 70%. Tomorrow's December CPI report, which is expected to see the core measures tick up, may see the probability of a hike increase further. November retail sales out at the end of the week are expected be strong, with the second consecutive monthly increase of more than 1%. 

The US dollar appeared to have entered a consolidative phase against the Canadian dollar after falling almost 4% from the Dec. 20 high (~CAD1.2965) to the Jan. 13 low (~CAD1.2455). In this phase in the CAD1.2600 area, the neckline of the head and shoulders pattern we were tracking, offers initial resistance. The greenback tested the CAD1.2485 in early Asia and bounced to CAD1.2535 to mark the range so far today.

The risk-off mood saw the dollar rise to a three-day high against the Mexican peso (almost MXN20.41). It was the first time since Jan. 10 that the greenback rose above the previous session's high. However, before that, it was sold marginally through yesterday's lows. This set up for a possible key upside reversal for the dollar. The close would be key to this one-day pattern. It would need to close above yesterday’s high (~MXN20.3530) to confirm it. If confirmed, the first target may be the MXN20.50-MXN20.55 area.

Equities And Bonds Sell Off

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Equities And Bonds Sell Off

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