The swoon in equities, perhaps sparked by a rotation spurred by potential
US tax changes, is continuing today. It is providing a risk-off mood, which
is expressed in the foreign exchange market as a stronger yen. The most
compelling answer of yen strength is not that investors are buying yen as a
haven. Japanese stocks are among the worst of the major markets over the
past five days, ensured by today's nearly 2% drop by the Nikkei. Nor, of
course, are Japanese interest rates attractive. Rather the yen's strength
reflects unwinding trades use the yen to finance the purchase of other assets,
like equities. As the equities are sold, the yen is bought
We see the speculative directional plays as secondary in importance.
Speculators in the CME futures had accumulated the largest gross short yen
position in a decade in the middle of last month and were already reducing it,
though the dollar pushed through JPY113 at the start of the week, the high
since November 17.
The S&P 500 fell for the second day in a row yesterday and closed on
its lows, just above the support we noted near 2628. It will likely
push through there in the early going today and test the 2600 area, which marks
the low from the end of last week, the 20-day moving average and
congestion from the end of last month. Below there an unfilled gap
from the higher opening on November 21 may draw prices. The bottom of the
gap is near 2585.
The sell-off in Asian equities gained momentum. The MSCI Asia
Pacific Index fell 1.25%, matching its largest drop of the year. It is
the eighth consecutive loss, the longest losing streak in a couple of years.
Chinese shares were mixed, with the Shanghai Composite off 0.3%
and the Shenzhen Composite up almost 0.7%. However, the high-flying Hang
Seng China Enterprise Index (H-shares) shed 2.8%, which took a tool of the Hang
Seng Index, which fell a little more than 2%.
European shares are also being hit by profit-taking. The Dow
Jones Stoxx 600 is off nearly 0.75%. This could be the largest loss in a
month. Information technology and materials are the largest drags.
The weakness in these sectors are global. With extensive supply chains,
the tech sector often seems highly correlated across countries. Copper is
stabilizing after it suffered its biggest single-day drop in more than two
years. However, other industrialized metals, including iron ore,
aluminum, and zinc remain under pressures ostensibly due to concerns about
demand from China next year. The energy complex is lower amid concern
about the US industry association seeing a build in gasoline inventories.
Gold is recovering after dipping below $1260 for the first time since
The greenback is testing support near JPY112.00. A convincing
break could signal a move toward JPY111.40, and possibly even a test on the
late-November low near JPY110.85. Note that the five-day average is set
to move below the 20-day average for the first time since the middle of last
month. The euro has moved in about a third of a cent today but remains at
the lower end of yesterday's range. The $1.1800 area, were several
technical levels coincide, remains intact. News of stronger than
expected German data (factory orders rose 0.5% increased of falling 0.2% as
many economists expected and the September series was revised to 1.2% from
1.0%) failed to impress traders.
On the other hand, disappointing Q3 GDP (0.6% vs. expectations for 0.7% and
weak consumption) saw the Australian dollar surrender the remainder of the
retail sales inspired gains that were not unwound in North America yesterday.
The Aussie had tested the $0.7655 resistance area we cited, but back to $0.7600
in the North American afternoon yesterday. It sold off further, reaching
almost $0.7570 before recovering in the European morning back toward
$0.7600. Australian bonds rallied strongly, with the 10-year yield
dropping 9 bp to 2.50%, and the two-year yield is off six basis points to
1.77%, to once again slip below US yields.
After being rebuffed by her junior coalition partner while she was at
lunch with Juncker, UK Prime Minister May exposed her other flank and reports
suggest that the hardliner Brexit cabinet members, Johnson and Gove are nipping
at her heels again. May is in a bind. The more she tries to
meet the new deadline to get to the next stage of talks, the more her domestic
vulnerabilities are clear. May cannot deliver the kind of movement that
the EU wants. The DUP threatened to force elections, despite
the fact that Labour, who is ahead in most polls, would sacrifice their
interests. A compromise on the European Court of Justice or even offering
to stay close to the EU regulatory regime risks dividing her
Sterling is extending its losses for a second session. It is
off about 0.5% at $1.3380. It had been testing $1.3550 a few days ago,
Initial support is seen now near $1.3350, and below there $1.3300. Canada
followed up last week's strong employment report with news of a smaller than
expected trade shortfall and a rise in non-oil exports. The US dollar
frayed support near CAD1.2660 before rebounding session highs in sympathy with
its gains against the euro and sterling.
The US dollar is retesting that support now, ahead of the Bank of Canada
meeting. Central bank officials have indicated the desire to remove
more accommodation over time, but are not in a hurry given the two hikes in Q3,
the apparent slowing of the economy, and risks emanating from abroad (see US
The data highlight from the US is the ADP jobs estimate, ahead of
Friday's government report. Outside of headline risk, the data is
unlikely to distract investors from the other stories. These include the
approaching December 8 deadline for spending authorization, which if not
remedied, can see parts of the government shutter. The Republicans seem
divided between as very short extension (December 22) a short extension
(December 30) and the Democrats remain on the sidelines. Also, news that
President Trump will announce later today that the US officially recognizes
Jerusalem as the capital of Israel has already spurred warnings of the
antagonism that it entails, and without moving the US embassy, little appears
to be gained. It can add to investor uncertainty and volatility.
Meanwhile progress on US tax reform is on hold as the Senate members of the
reconciliation committee must be named. There is some risk that the
compromises that made passage of the Senate version possible are unwound in the
Lastly we note that Brazil is widely expected to cut its Selic rate by 50 bp today after the markets close. The rate cutting cycle began last year when the Selic was above 14%. The cut today completes the round turn and brings the Selic rate blow where it bottomed in 2012-2013. indeed today's cut would bring it to a record low since its was introduced in the late 1990s.