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Market Sentiment Remains Fragile After Latest Plunge

By Marc ChandlerForexNov 29, 2021 06:33AM ET
Market Sentiment Remains Fragile After Latest Plunge
By Marc Chandler   |  Nov 29, 2021 06:33AM ET
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The fire that burnt through the capital markets before the weekend, triggered by the new COVID mutation, burned itself out in the Asian Pacific equity trading earlier today. A semblance of stability, albeit fragile and tentative, emerged.

Europe's Stoxx 600 was up about 1%, led by real estate, information technology, and energy. US index futures were trading higher, with the NASDAQ leading. Benchmark 10-year yields are firmer. The US 10-year Treasury yield rose about six basis points to 1.53%. European yields were mostly 1-2 basis points higher, while the UK Gilt yield was up four basis points.

The dollar remained, as we say, at the fulcrum of the major currencies, but in an opposite way, with the funding currencies that rallied strongly before the weekend seeing their gains pared today, while the dollar bloc and Scandis traded firmer. Among the emerging market currencies, the liquid and freely accessible currencies, such as the South African rand, Russian ruble, and Mexican peso leading the recovery.

The Turkish lira and central European currencies, perhaps dragged down by the softer euro, underperformed. The JP Morgan Emerging Market Currency Index was slightly firmer after falling around 0.4% before the weekend.

Gold held support near $1780, was unable to resurface above $1800. January WTI jumped by about 5% after the 13% drop at the end of last week. Iron ore surged 6.5%, recouping in full the 5.6% decline in the last session to approach its recent highs. Winter weather was beginning to be experienced in Europe, and natural gas (Netherlands) was up 7.75% after falling 4.8% ahead of the weekend. Copper was recouping a little less than half of last Friday's nearly 4% fall.

Asia Pacific

Faced with much unknown about the new mutation, several Asia Pacific countries were opting to close their borders to foreign travelers. Initially, countries limited the travel ban to a handful or so of countries from Southern Africa. It did appear that the Omicron variant has been around before, being sequenced in South Africa, and it was found in several countries. However, the origin was still not clear. While some reports from South Africa suggested mild symptoms, there was good reason for the World Health Organization's caution. If a new vaccine was needed for the variant, reports suggested it could take around 100 days. 

Recall that Japan lifted its formal emergency in late September, and the economy was rebounding as anticipated. Today's data showed retail sales rose for a second month in October. The 1.1% increase lifted the year-over-year rate to 0.9%. Purchases of clothing and food surged by 9.2%. Auto sales, still hampered by supply chain disruptions, was the only category that fell. After a frustratingly slow start, Japan's inoculation efforts have been successful, and the vaccination rate was above 75%.

Before news of the new variant broke, the dollar was around JPY115.50. It fell to nearly JPY113.00 before the weekend. It recovered in early dealing to almost JPY113.90 before the weakness of the regional equities contributed to its push lower. Bloomberg pricing data showed it recorded a JPY112.99 low near midday in Tokyo. It bounced to almost JPY113.65 in late dealings and was consolidating in the European morning. The option for $350 mln at JPY113.40 that expires today has likely been neutralized. The market appeared to be waiting for a new development to push it out of the JPY113-JPY114 range.

The Australian dollar held the pre-weekend low slightly below $0.7115 and was making session highs late in the European morning near last Friday's high (~$0.7155). Nearby resistance was seen in the $0.7180-$0.7200 area. Recall that last week's 1.55% decline was the fourth consecutive weekly loss and the largest in three months.

The greenback gave up its pre-weekend gain against the Chinese yuan and a bit more today. It did not even trade above CNY6.39 today, settling above it at the end of last week. As we have noted, it remained within the range set on Nov. 16 of roughly CNY6.3670-CNY6.3965.

The PBOC set the dollar's reference rate at CNY6.3872 and continued to set it above expectations (CNY6.3858, via Bloomberg). Two issues seem to be receiving attention today. First were the prospects of easing by the PBOC in the face of continuing weakening of the economy. The November PMI will be released starting first thing tomorrow. Second, China's property developers have an estimated $1.3 bln in debt servicing next month, following $2 bln this month.


Outside of the virus, two issues dominated investors' attention in Europe today. First were the November inflation reports from Spain and Germany ahead of the preliminary aggregate figures tomorrow. The other was the increasingly bellicose rhetoric between the UK and France over the channel crossings and fishing.

Spain's harmonized November CPI rose by 0.3% to lift the year-over-year rate to 5.6%. It was the fastest pace since 1992. It follows October's 1.6% increase and 5.4% 12-month rate. Food and energy were the main drivers. The increase was in line with forecasts. In September, the central bank's chief economist had anticipated that November could be the peak in inflation and anticipated it falling back below the 2% target in 2022. 

German states were reporting their November CPI figures, and the country's measure will be reported late today. The states' measures were consistent with forecasts calling for the nation's harmonized measure to have fallen around 0.2%. However, the year-over-year pace was projected to accelerate to 5.5% from 4.6% due to the base effect. The EMU aggregate preliminary CPI was forecast (Bloomberg median) to be flat on the month for a 4.5% year-over-year pace (up from 4.1% in October). The core rate was projected to climb to 2.3% from 2.0%. 

The euro poked slightly above $1.1330 at the end of last week and settled just above $1.1315. It traded near $1.1260 in late Asia/early Europe and caught a bid that brought it back to about $1.1290. There is a 1.7 bln euro option at $1.13 that expires today. The intraday momentum indicators were getting stretched, warning of the downside risk in early North American activity.

Sterling recorded a new low for the year ahead of the weekend, near $1.3280. It was trading in about a quarter-cent range today, around $1.3335, and stayed within last Friday's range. The pre-weekend high was closer to $1.3365. After an eight-day rally, the December short sterling interest rate futures contract was trading slightly heavier today. The market expectations shifted from a good chance of a hike next month to a bit more than a third of a chance.


The US auto sales and jobs highlight this week, but Fed officials were out in force too. Today Powell, Williams, and Hasson speak at an innovation conference, and Bowman discusses the central bank and indigenous economies. Tomorrow, Powell and Yellen testify before a Senate committee on the CARES Act. Their prepared remarks were expected to be released later today that may also work for the testimony on Wednesday on the same topic before a House committee.

Tuesday, Clarida discusses the Fed's independence, while Williams will speak on food security. The Beige Book, in preparation for next month's FOMC meeting, was due Wednesday too. No fewer than five Fed officials speak in the second half of the week. Our initial bias continued to be for faster tapering at the December FOMC meeting. It still seemed to be the prudent course to maximize the Fed's ability to respond to a broad range of probable economic outcomes. 

The US pending home sales and the Dallas Fed manufacturing survey, due today, are not typically market movers. And today would unlikely be an exception. Canada reports its Q3 current account surplus (expected to be around C$5.7 bln, up from C$3.6 bln in Q2. It also reports raw material and industrial prices for October.

The week's highlight is tomorrow's September and Q3 GDP, followed by Friday's employment report. Mexico reports October unemployment figures (median forecast in Bloomberg's survey calls for a 4.07% rate, down from 4.18% in September). Concerns about President AMLO's appointment to the central bank lingers even though the peso may benefit from the correction to the 1.6% pre-weekend drop.

The US dollar spiked to almost CAD1.28 before the weekend. It fell to nearly CAD1.2720 today. The pullback was seen in Asia, and it has been consolidating since then. Still, the greenback looked vulnerable to a further retracement of the pre-weekend gains. Initial potential extended toward CAD.2680-CAD1.2700. The broader risk appetites may be the key today for both the Canadian dollar and Mexican peso.

The greenback jumped to MXN22.1550 amid the pre-weekend turmoil. This marked the high for the year. It pulled back initially to MXN21.6850 in Asia, but the selling pressure eased, and it traded in an MXN21.7630-MXN21.9000 range in Europe. We suspect the combination of the trajectory of US monetary policy plus the concerns about the central bank of Mexico boosted the chances that the peso underperforms generally. Moreover, rising price pressures and a weak economy put officials in a difficult position, especially given AMLO's reluctance to deploy fiscal measures to support the economy.

Market Sentiment Remains Fragile After Latest Plunge

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Market Sentiment Remains Fragile After Latest Plunge

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