Global Capital Markets Finding Surer Footing

There continues to be a gradual drift back to the forces that were in play before the drama of the second half of last week. While most Asian bourses were lower, with the MSCI Asia-Pacific Index off almost 0.5%, European markets and higher and the US is called about 0.5% higher. Core bond markets are mostly lower, while the peripheral bonds turn better bid.

Most emerging market currencies are recovering and the MSCI Emerging Markets equity index is around 0.5%. Local bond yields are mostly lower in countries hardest hit in last week's air pocket, like Turkey, Indonesia and South Africa. India's central bank surprised the market by hiking the repo rate 25 bp to 8%. The rate hike was delivered in the face of apparent political pressure from the government, illustrated by last week's "reminder" from the finance minister that the central bank's responsibility was to promote growth. The rate hike helped underpin the rupee, though weighed slightly on Indian shares.

Turkey's central bank decision is before the Asian session begins on Wednesday. Most observers appear to be expecting a large rate increase on the magnitude of 200-300 bp. There is a minority opinion suggesting a smaller rate hike and some form of capital controls may be announced.

The US dollar is generally firmer, but the Australian and New Zealand dollars are firm as well. The RNBZ meets, with results tomorrow. The OIS market continues to discount around a 45% chance of a hike, though we would attribute slightly less probability. We note that for what appears to be the first time, at least recently, the New Zealand government expressed some dissatisfaction with the New Zealand dollar's gains against the Australian dollar.

The Australian dollar is trading at a three-day high, helped by a business confidence survey that reached a 2.5 year high. Many are still inclined to sell in Aussie gains and it did run out of steam near $0.8820. However, we suspect there is near-term potential toward $0.8870.

The main news from the European morning has been the first look at the UK's Q4 GDP. It was spot on expectations with a 0.7% quarterly rise for a 2.8% year-over-year expansion. That expansion still leaves the UK economy a little below its pre-crisis peak. A new high is likely here in early 2014. As for the sectoral breakdown, it is largest as expected as well. The industrial sector expanded by 0.7% and the largest services sector grew 0.8%. Construction was a 0.3% drag.

Sterling failed to respond positively and continued to drift lower after peaking near $1.6625 in Asia. Now did sterling derive much benefit from the continued backing up of implied yields in starting with the December '14 short sterling futures contract. A shelf in sterling comes in around $1.6450-80, which corresponds to the Friday-Monday lows, the 20-day moving average and the 61.8% retracement of the rally from the month's low (January 17 ~$1.6310).

The euro is also trading at three day lows, a full cent off last Friday's high. It has come into a support area defined by a retracement of last week's rally (~$1.3610), the 20-day moving average (~$1.3630) and the 100-day moving average (~$1.3595). We note that the EMU Sentix break-up index is made new record lows in January of 13.3%, down from 17% in December. It peaked at 73% in mid-2012. Greece is the highest at 10.8%, with Cyprus (and its capital controls) at 6.6%).

We found that the dollar-yen exchange rate is more closely correlated (60-day percent change basis) with the S&P 500 than the Nikkei (here). The Nikkei's losses, for the fourth session, did not prevent the dollar from continuing to recover against the yen, which makes sense given the S&P rise. Initial resistance has been tested near JPY103.30. A pullback toward JPY102.80 may be seen as a new buying opportunity for those looking expecting a resumption of the weak yen trend.

Tomorrow, the FOMC meeting concludes tomorrow. On balance, it appears that most expect the tapering announced last week will continue in February. The emerging market turmoil and drop in the US equity market does not seem to be sufficient to get the Fed to alter its course outlined just a few weeks ago.

Today, economists will use the durable goods orders report to fine tune Q4 GDP forecasts, which are now coming in around 3% or a little more. Boeing orders likely helped lift the headline. CaseShiller house price index will also be released. Another small increase is expected, lifting the year-over-year rate to 13.8%. The Conference Board's consumer confidence measure and the Richmond Fed's survey, both for January will also be released. On the earnings front, there are a few big names including, AT&T Inc, (T), DR Horton Inc, (DHI), Ford Motor Company, (F), Pfizer Inc, (PFE) and Yahoo! Inc, (YHOO).