Dollar Bulls Still Not That Confident

Monday January 8: Five things the markets are talking about

With risk assets enjoying a strong start to the New Year, the beginning of corporate earnings season is expected to dictate the next move for the stock markets.

In overnight trade, the EUR (€1.1989) and the pound (£1.3529) have retreated against the dollar, while U.S Treasury yields have little changed in light trading, while oil trades above +$61 a barrel.

Economic data in the coming week focuses mostly on merchandise trade balances and industrial production for November and prices in the U.S.

On Tuesday, Germany releases its important manufacturing orders and industrial production data along with its merchandise trade surplus. Wednesday sees China beginning to release its monthly data with December consumer and producer prices and merchandise trade balance. While down-under, Australia reports retail sales for December late Wednesday.

Stateside this week, U.S inflation data Thursday and Friday tops the agenda and will probably show price pressures remain muted, giving dollar ‘hawks’ no ammo to argue for a faster Fed tightening.

Also, a couple of Fed speakers should be of interest for capital markets – SF Fed President Williams and head of the NY Fed Dudley are among policy makers scheduled to speak.

1. Stocks are given the green light

Both Asian and European markets have traded generally higher after Friday’s gains in the U.S

Note: The Nikkei 225 was closed for holiday.

Down-under, Australian shares marked a ten-year peak overnight and rallied to end their fourth session higher on Monday, helped higher by financials and a positive cue from Wall Street. The S&P/ASX 200 index ended the session +0.1% higher. In Korea, the Kospi edged higher in light trade, up +0.11%.

Note: South Korea has stepped up its currency warning – Korean Won (KRW) has weakened ahead of Tomorrow’s expected talks with North Korea.

In Hong Kong, the benchmark stock indexes rallied for a 10th consecutive session overnight, aided by bullish sentiment in global equity markets, and inbound investment from the mainland. At close, the Hang Seng index was up +0.28%, while the Hang Seng China Enterprises index rose +0.19%.

In China, stocks end at a six-week high with property developers lending support. At the close, the Shanghai Composite index was up +0.54%, while the blue-chip CSI300 index was up +0.52%.

In Europe, regional indices are trading higher across the board, led by the DAX and the CAC – this follows the record closes in U.S Indices despite last Friday’s weaker non-farm payroll (NFP) report.

U.S stocks are set to open unchanged.

Indices: Stoxx600 ++0.3% at 398.3, FTSE flat at 7727, DAX +0.4% at 13374, CAC-40 +0.4% at 5491, IBEX-35 +0.2% at 10434, FTSE MIB 0.1% at 22786, SMI +0.1% at 9561, S&P 500 Futures flat

2. Oil stable on lower U.S. rig count, gold little changed

Oil prices are stable, supported by a slight decline in the number of U.S rigs drilling for new production. Prices are holding just below the commodities three-year highs reached last week.

Brent crude futures are at +$67.66 a barrel, up +4c above Friday’s close, while U.S West Texas Intermediate (WTI) crude futures are at +$61.50 a barrel.

Note: Brent hit +$68.27 high last week, the highest since May 2015, while WTI futures reached +$62.21, the most since May 2015.

The slight gains are mostly due to a slight decline in the number of U.S rigs drilling for new production, which has eased by five in the week to Jan. 5 to +742, according to data from oil services firm Baker Hughes.

U.S crude prices have now entered a price range that is anticipated to attract increased shale oil production, which is expected to put a temporary cap on future higher prices.

Note: Rising U.S production is the main factor countering production cuts led by OPEC and by Russia, which began in January last year and are set to last through this year.

Ahead of the U.S open, gold prices have dipped as the U.S dollar firms a tad on rate hike views. Spot gold trades below its 3-1/2-month highs hit last week at +$1,322.73 an ounce – last week, prices touched their highest since Sept. 15 at +$1,325.86.

3. Euro yields face a busy issuance

Euro borrowing costs are set to back up with this week’s new bond supply.
Germany, Austria, the Netherlands and Italy are expected to sell almost +€12B of bonds this week.

Note: January is one of the busiest months for new bond supply and fixed income traders need to cheapen their sovereign curves to take down supply.

For the bond ‘bull,’ benign Euro inflation environment would suggest that the markets should be capable of absorbing the new supply with few problems.

Note: Euro inflation data last Friday showed a +1.4% year-on-year in December, well below the ECB’s near +2% target. The core-measure (ex-food and energy) was +1.1%.

The yield on U.S 10-year Treasuries decreased less than -1 bps to +2.47%, while in Germany, the 10-year Bund yield has decreased -1 bps to +0.43%, the lowest in a week.

4. Dollar finds some much needed traction

EUR/USD (€1.2006) has continued to back away from its three-month highs as some German economic data missed its mark and while Chancellor Merkel faces a complex coalition-building task in Germany. Nevertheless, the Chancellor remains optimistic that her conservatives and the Social Democrats (SPD) could form a government.

Sterling (£1.3545) starts the weak a tad softer on that back of weaker economic data. U.K Visa December Consumer Spending saw its first end of year decline in five-years and the overall 2017 consumer spending enduring its first annual decline since 2012. The pound is also weighed upon be renewed speculation that U.K PM Theresa May will announce a Cabinet reshuffle and perhaps name a minister for a “No Brexit” position.

Bank of Canada (BoC) business survey at 10 am EDT could support a possible rate hike next week. Last Friday, Canada’s unemployment rate dropped to a four-decade low in December and job creation exceeded expectations for a second consecutive month. The Canadian economy added a whopping net +78.6k jobs in December vs. market expectations of +2k. The loonie is trading flat C$1.2400.

5. Eurozone confidence stronger than expected in December

Data this morning showed that the surge in eurozone regional confidence continued as last year drew to a close, with the ESI (Sentix) rising more sharply than expected to hit its highest level in 17-years.

The aggregate measure of business and consumer confidence jumped to 116.0 in December from 114.6, as against a consensus forecast of 114.8.

The headline was driven in part by a rise in industrial confidence. It would suggest that the regions accelerated expansion would continue into the early months of the New Year.

Be aware, any drop in consumer inflation expectations will only worry ECB policy makers as that could feed into more modest wage demands.

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