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Markets Calmer, Awaiting Fresh Incentives

By Marc ChandlerForexDec 08, 2021 06:20AM ET
Markets Calmer, Awaiting Fresh Incentives
By Marc Chandler   |  Dec 08, 2021 06:20AM ET
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The capital markets were calmer today, and the fear that was evident at the end of last week remained mostly scar tissue. Led by gains in Japan, China, Australia, New Zealand, and India, the MSCI Asia Pacific Index extended yesterday's gains. Europe's STOXX 600 and US futures were firm.

The US 10-year yield was softer, around 1.43%, while European yields were mostly 1-2 bp lower. The Norwegian krone and euro led major currencies higher against the greenback, but the New Zealand dollar and sterling were underperforming. Most of the emerging market currencies were enjoying an upside bias. The Turkish lira was giving back a little more than half of yesterday's 2.25% bounce.

Gold was edging higher and was near the 200-day moving average (~$1792). January WTI was off $1 around $71 after rallying around 8% in the past two sessions. API reported a three million barrel drawdown in inventories but a big jump in Cushing.

US natural gas was consolidating and paring Monday's 11.5% drop. Europe (Dutch) natural gas prices were rising for the third consecutive session and around 10% this week. Iron ore extended this week's rally and was at the highs since October. Copper was flat.

Asia Pacific

Australia joined the US in the diplomat boycott of the winter Olympics in Beijing. South Korea and Japan have not formally decided yet. China's quarantine policies made it difficult for many diplomats to attend in any event, and many apparently will not attend. Beijing threatens unspecified retaliation.

Japan reported an increase in its October current account, rising to JPY1.18 trillion from JPY1.03 trillion in September. The swing in the trade balance from a JPY230 bln deficit to a JPY167 bln surplus more than accounted for it. Japan also revised Q3 GDP to a 0.9% contraction (from -0.8%). The composition changed. Consumption was a greater drag (-1.3% quarter-over-quarter rather than -1.1%), and inventories contributed less (0.1% vs. 0.3%) and net exports were flat (rather than contribute 0.1 percentage points).

Business investment was less a drag (-2.3% vs. -3.8%). Still, there was reason to be more optimistic about the outlook for the world's third-largest economy. Social restrictions have eased, the vaccination rate has been amongst the best, and the government has been providing fresh stimulus. The Kishida government was expected to finalize its fiscal efforts toward the end of the week. A key issue has been the tax incentive (subsidy) for companies that boosted wages by 3%, which has not happened since 1997.

India left its key rate corridor on hold today. The repo rate was 4%, and the reverse repo rate was 3.35%. Some observers saw the possibility of a hike in the reverse repo rate. The monetary policy committee voted unanimously to keep the repo rate steady. The reverse repo rate is a broader issue decided by the central bank, not the MPC.

The emergence of Omicron may have encouraged the central bank to maintain a steady hand, while the cut in the excise duty and VAT for petrol and diesel may help ease price pressures. It made some technical changes in its liquidity management, which some see as a prelude to a hike in February 2022, when the central bank meets again.

The dollar was consolidating in a narrow 30-point range above JPY113.35 against the Japanese yen. Yesterday's high was just below JPY113.80. An option for about $550 mln will roll off today at JPY114.25, while there was a nearly $1.5 bln option at JPY114.00 that expires tomorrow. The JPY114 area also held the 20-day moving average, which the dollar has not closed above since Nov. 25.

The Australian dollar began the week flirting with the $0.7000 area. It was rising for its third consecutive session and reached almost $0.7145 today. Last week's highs were set a little above $0.7170.

Despite words of caution by Chinese officials and the cut in reserve requirements, the yuan continued to march higher. It was at new three-year highs today. The dollar was sold down to almost CNY6.3455. Local dollar bonds and bonds below investment grade rallied as officials signaled a focus on supporting the economy. Today the rate for re-lending to rural and small businesses was cut by 25 bp. The PBOC was also generous with its liquidity provisions. The reference rate for the dollar was set at CNY6.3677, a little firmer than expected (CNY6.3665, Bloomberg survey).


An era was formally over today as Germany's new government took office. The challenges it faces are profound. The virus was surging even before the Omicron variant was detected. The economy has been hobbled. Inflation is high (6% on the harmonized measure in November) and without the fiscal stimulus seen in the US, where CPI was up 6.2% from a year ago (October).

This year, the German deficit is estimated to be about 5.8% and seen falling to 2.5% next year. The US deficit is around 12.5% this year and is expected to fall to around 6.5% in 2022. Russia was amassing troops, and fears that it will invade Ukraine early next year were running high. Germany reportedly will nix the controversial Nord Stream II pipeline if Russia carries through with its threat as part of the economic sanctions being considered. 

Italy's Draghi has had a bit of a honeymoon, but that will change. Two of the three largest unions will strike on Dec. 16 to protest Draghi's budget, which must be passed by the end of the month. Moreover, the selection of a new Italian president in January may mark the beginning of the political process that will lead to a new parliamentary election by the middle of 2023.

The president of Italy is chosen by the Italian Parliament and regional representatives. The current president, Mattarella, has declined to run for a second term. Draghi does lead his political party, but the latest surveys show the center-left Democratic Party was in first place, polling a couple percentage points higher than it got in the last election at 21.4% support. The Brothers of Italy on the right were in second place with slightly less than 20% support. The Five Star Movement saw its fortunes slip to about 15%. 

Poland's central bank is set to hike its base rate today. It will be the third consecutive increase. The base rate was slashed from 1.50% last year to 10 bp. It was hiked by 40 bp in October and 75 bp last month to stand at 1.25%. The headline CPI surged from 2.4% at the end of last year to 7.7% in November.

The Czech Republic and Hungary have been more aggressive in raising rates. Last month, Czech's central bank delivered a 125 bp increase to lift its key two-week repo rate to 2.75%. It was at 25 bp to start the year. Its CPI was near 6%. Hungary raised its base rate every month since June and took it from 60 bp to 2.10%. It has also taken its one-week deposit rate from 75 bp to 3.10%, with 130 bp delivered in the past three weeks. Earlier today, it reported that CPI rose to 7.4% last month from 6.5%. Most look for a 50 bp increase from Poland's central bank today.

The euro briefly dipped below $1.1230 yesterday but recovered in the North American afternoon. It was extending the recovery today and traded $1.1300 in the European morning. The $1.1310-$1.1320 offered nearby resistance.

The UK government was being embarrassed by reports about its holiday party a year ago in violation of the social restrictions in place at the time. It added to the sleaze factor that has weakened it. The latest polls show that the Labor Party was extending its lead. Also, ideas that the BOE could raise rates next week have diminished and been pushed into next February. Sterling was heavy, near $1.3200. We warned of near-term risk toward $1.3165, the (38.2%) retracement objective of the rally from the March 2020 low near $1.14.


A deal appeared in the works to lift the US debt ceiling. The maneuver would require 60 votes to allow the debt ceiling to pass with a simple majority. The Republican leadership appeared willing to go along with this. It will likely set a new precedent that will be used and possibly expanded when control of Congress changes. PredictIt.Org showed that the Republicans were favored to win control of both houses in next year's mid-term election.

The US calendar today featured the JOLTS report on job openings. The week's highlight, the November CPI, is out on Friday, and both the headline and core rates were expected to accelerate. Fed officials were in the blackout period ahead of next week's FOMC meeting. Today's North American feature will be the Bank of Canada meeting. No one expects a change in rates. It is more about the rhetoric.

Despite the uncertainty surrounding the Omicron variant, Bank of Canada officials were likely to be more confident about the strength of the recovery. Last week's jobs data added to the positive impulses. Moreover, the government was providing more fiscal support. The biggest challenge was that the market had discounted five hikes over the next 12 months. This was aggressive and difficult for the central bank to get ahead of market expectations.

Even after the strong Canadian jobs data at the end of last week, the US dollar closed firmly above CAD1.28, showing the Loonie's vulnerability to the risk-off wave. However, as cooler heads have prevailed, the Canadian dollar bounced back. The US dollar closed below the 20-day moving average yesterday (~CAD1.2670) for the first time in a month and was sold to about CAD1.2620 today. The (38.2%) retracement of the greenback's rally since the Oct. 21 low (below CAD1.23) was found near CAD1.2640. The next retracement (50%) was around CAD1.2570. Initial resistance was likely by CAD1.2680.

The greenback also closed below its 20-day moving average against the Mexican peso yesterday for the first time since Nov. 9. It slipped below MN21.00 today for the first time in about two-and-a-half weeks. With today's loss, the US dollar retraced (61.8%) of its rally from Nov. 9 low (~MXN20.2750). The move seemed exaggerated, and consolidation was likely. Nearby resistance was seen in the MXN20.05-MXN20.10 area.

Markets Calmer, Awaiting Fresh Incentives

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Markets Calmer, Awaiting Fresh Incentives

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