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Strong Earnings and Easing of (Some) Political Tensions Bolster Sentiment

Summary:
Overview:  Helped by new record highs in the S&P 500 and Dow Industrials, constructive earnings, and an easing of political tensions, risk appetites are robust today.  The MSCI Asia Pacific Index recouped yesterday's losses plus more as the large equity markets in the region, but China and Hong Kong rose, led by a more than 1% gain in Tokyo.  European shares are rallying, and the Stoxx 600 is posting gains for the ninth session in the last 11 and is at its best level since early September.  US futures are extending yesterday's gains.  European and US benchmark yields are softer.  The US 10-year is slipping below and little changed near 1.62%.  It had probed the 1.70% area at the end of last week.  It has not been below 1.60% for a week.  European yields are mostly 1-3 bp lower.  The

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Strong Earnings and Easing of (Some) Political Tensions Bolster Sentiment

Overview:  Helped by new record highs in the S&P 500 and Dow Industrials, constructive earnings, and an easing of political tensions, risk appetites are robust today.  The MSCI Asia Pacific Index recouped yesterday's losses plus more as the large equity markets in the region, but China and Hong Kong rose, led by a more than 1% gain in Tokyo.  European shares are rallying, and the Stoxx 600 is posting gains for the ninth session in the last 11 and is at its best level since early September.  US futures are extending yesterday's gains.  European and US benchmark yields are softer.  The US 10-year is slipping below and little changed near 1.62%.  It had probed the 1.70% area at the end of last week.  It has not been below 1.60% for a week.  European yields are mostly 1-3 bp lower.  The dollar is narrowly mixed.  Sterling and the dollar bloc are trading with a firmer bias, while the yen and Swiss franc are underperforming. After a rapprochement to the latest drama, the Turkish lira rallied 1.5% today to lead the emerging market currencies higher. Poland, Hungary, and the Philippine peso are seeing minor losses.  Gold is recording a lower high for the second consecutive session but is holding above $1800. A break could spur a test on the 200-day moving average around $1793.  December WTI, which poked above $85 a barrel yesterday, has come back softer today in the roughly $83.00-$84.15 range.  Note that EU ministers are meeting today to discuss how to balance efforts to cushion the blow of high energy prices with the efforts to address climate change and reduce carbon use.  Copper prices are weaker as they slip for the fifth time in the past seven sessions.  The CRB Index made a new multi-year high yesterday.  

Asia Pacific

China's Vice Premier Liu He and US Treasury Secretary Yellen held their second call in four months yesterday.  China said the call was "pragmatic, candid, and constructive."  Still, it seems that Bloomberg's assessment that the overall US-China relationship has improved since Biden and Xi held a phone call last month seems like a stretch.  There was a successful "prisoner exchange,"  but there is little else concrete that one can point to, and no date has been set for the so-called virtual summit, which seems like a fancy way to say a phone call in this Covid era, between the two leaders.  

At the end of last week, the Reserve Bank of Australia intervened for the first time in more than six months to defend its 10 bp target of the April 2024 bond. The yield reached 19 bp before the central bank stepped in and bought A$1 bln of the bond.  The yield is still above the target, and the market seems inclined to test the RBA's resolve.  The swaps market is pricing in about 40 bp of tightening in a year.  Governor Lowe argues that until inflation is sustainably in the 2%-3%, which he does not anticipate until 2024.  Australia reports Q3 CPI first thing tomorrow in Canberra.  The headline is expected to have increased by 0.8% in the quarter, the same pace as Q2.  The year-over-year rate is likely to moderate to 3.1% from 3.8%.  The trimmed mean and weighted mean measures may tick up but will likely remain below 2%.  The RBA meets next Tuesday morning in Australia.  

The dollar settled near JPY113.40 at the end of last week and has recovered to push against JPY114.00, where options for $620 mln expire today.  The momentum seems to have faltered a bit in the European morning. The proximity of the BOJ meeting and the election may deter aggressive moves in the exchange rate.  The Australian dollar reached a three-day high above $0.7500.  Last week, it peaked closer to $0.7545.  This seems too far away for a test today, though the intraday technicals allow for a marginal new high in North America.  The greenback slipped slightly against the Chinese yuan.  It drew the closest to CNY6.38 since June.  The reference rate was set at CNY6.3890 today against expectations (Bloomberg survey) for CNY6.3879.  The PBOC's liquidity provision was generous for the second consecutive session, citing the upcoming tax date and flurry of local government bond sales to exhaust this year's quota. According to reports, an estimated CNY644 bln in bonds will be sold this week, which may be the second-largest weekly issuance.  Lastly, we note that the Korean won edged higher against the US dollar for a third session, even though Q3 GDP disappointed.  The quarterly expansion of 0.3% was half of what economists projected.  The central bank meets late next month (November 25) and is widely expected to hike rates after an initial move in August.  

Europe

Two hot spots in Europe de-escalated yesterday.  First, Poland's Prime Minister Morawiecki indicated the objectionable mechanism to discipline judges would be dissolved before the end of the year.  However, he demanded that the EC drop its threat of daily fines on Warsaw for not implementing the European Court of Justice rulings.  Part of the challenge is that the government lost a coalition partner over a couple of months ago and must prepare for an election.  It does not have to call one until 2023, but its minority status limits its initiatives.  Many think an election next spring is possible.  Second, to be filed under diplomacy on Twitter, the US tweeted that it adheres to the international convention that envoys do interfere in the domestic affairs of their host country.  The US ambassador and nine other ambassadors jointly called for the release of a businessman who is charged with participating in the coup against Erdogan after an earlier trial had acquitted him of trying to overthrow the government.   A few of the countries made a similar statement, another re-tweeted the US tweet.  That apparently was sufficient for Erdogan, who stopped his threat to kick the ambassadors out of the country.  

On the other hand, the EC talks with the UK today over modifying the Northern Ireland protocol are in a difficult place.  The Commission offered many concessions regarding the inspection regime for goods entering Northern Ireland from the rest of the UK.  Ironically, this seems to have been the easiest part. However, the UK is insisting on abolishing the role of the European Court of Justice.  A possible compromise is where the arbitration panel is established to resolve conflict while the ECJ has a role in interpreting EU law.  The UK's negotiator explicitly rejected the potential compromise.   It is not clear if Article 16, which allows for unilateral action under some conditions, covers the objection to the role of the ECJ, which is enshrined in the protocol. 

The euro was pushed below $1.16 yesterday for the first time in a week and found a bid near $1.1590.  It is holding above there today but has been unable to reclaim $1.1615.   There are nearly 1.3 bln euros of options struck at $1.1600-$1.1610 that expire today, and tomorrow there is an option for almost 1.2 bln euros at $1.1600.  The ECB meets Thursday, and while no policy changes or new initiatives are expected, there is some risk that a softening of the assessment of the transitory nature of price pressures may be seen as supportive of the exchange rate.  At the same time, it will be limited by strong expectations that the Federal Reserve announces the beginning of its tapering next week.  For the fifth consecutive session, sterling remains in the range set last Tuesday (~$1.3725-$1.3835).  Chancellor of Exchequer Sunak will deliver the budget tomorrow.  Today's press coverage discusses efforts to boost investment and lift the pay freeze on public sector workers next year.  Sterling looks poised to push above $1.38, which it hasn't yet today.  However, the momentum indicators are getting stretched, and the band of resistance extends from $1.3835 to $1.3850, where the 200-day moving average is found.

America

Reports suggest that the Senate Democrats may be nearing an agreement on Biden's infrastructure initiative and that West Virginia's Manchin is optimistic about an agreement later this week.  However, this does not mean that the deal is done. Instead, it seems to shift the focus back to the House.  The challenge is that the compromise that allows a deal in the Senate is likely to prove unsatisfactory to many Democrats in the House.  Moreover, just like Bush's tax cuts largely survived Obama's two terms, it looks as if Trump's corporate tax cut to 21% will remain.  Remember, there is a significant difference between tax schedule rates and real effective tax rates given the allowances, deductions, and "tax minimization" strategies.  

The US reports August house prices and September new home sales.  House prices likely edged higher.  The CoreLogic/Case-Shiller Index (20 cities) may have ticked up to 20% year-over-year.  The FHFA measure has risen by about 17.5% year-over-year.  New home sales are recovering from the soft patch hit in the April-June period when they declined each month.  They grew in July and August and are expected to have risen further last month.  The October Conference Board's measures of consumer confidence and the Richmond Fed's manufacturing survey will also be announced today but are not typically market movers.  In the second half of the week, the data stream turns more substantive, highlighted by the first look at Q3 GDP on Thursday.  

The Bank of Canada meets today.  A robust labor market, robust exports, and strong housing should bolster officials' confidence.  Canada joined a selected group of countries, including the US and Germany, with headline CPI above 4%.  The central bank is expected to reduce its bond purchases to C$1 bln a week from C$2 bln and could signal an end to it later this year.  It will also update its economic projections.  The key is when it sees the output gap closing.  It has said near mid-2022, and this was the signal of a rate hike around then.  However, the market is pricing the first hike in the March-April period.  

For six sessions now, the US dollar has been capped at or a little below CAD1.2400, where a $720 mln option expires today.  Initial support is seen around CAD1.2360.  The intraday momentum studies suggest a bias higher in the North American morning.  A break above CAD1.2400 may run into offers in the CAD1.2410-CAD1.2425 area.  Mexico has a light economic diary.  It reports the September trade balance tomorrow and Q3 GDP on Friday.  The peso is bid in Europe and will start the North American session near last week's best level (with the US dollar near MXN20.1250).  The market seems to have its sights set on a test of MXN20.00.  Brazil reports its IPCA inflation today.  While the month-over-month pace may ease slightly, the year-over-year rate may push a bit more above 10%.  The central bank meets tomorrow, and there is some speculation that it could hike by more than the 100bp it moved by in August and September.  The median in Bloomberg's survey now sees a 150 bp move.  Such speculation appeared to help the real post some corrective upticks yesterday amid position squaring.  The dollar may find support near BRL5.50, and there is a $300 mln option at BRL5.48 that expires today.  


Disclaimer

Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.

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