U.S Dollar Hits Fresh Highs on Thanksgiving Holiday

Thursday November 24: Five things the markets are talking about

The dollar is extending its gains following yesterday’s strong U.S durable goods and consumer confidence data, along with Fed minutes that all but cemented a Fed rate hike next month.

Europe’s single unit has fallen to its lowest level since March 2015 (€1.0518) on fears ahead of the Italian constitutional referendum (Dec 5) as opinion polls show an increasing likelihood that the electorate will vote against the PM Renzi’s proposal.

The next two weeks should see a further uptick in volatility for the region ahead of the vote.

Thin liquidity due to the holiday-shortened week is also causing exaggerated price moves, with the dollar the main beneficiary as it hits a seven-month high against the yen of ¥113.53.

1. Euro stocks get the green light, EM hurting

In Asia, regional indexes moved mostly lower amid concerns that higher U.S. interest rates and a stronger dollar would hurt emerging markets.

Korea’s Kospi index lost -0.9%, falling for the first time in three-days, while Jakarta’s benchmark gauge lost -1.2% and Hong Kong’s Hang Seng Index fell -0.3%.

Again the outlier for a 10th consecutive day is Japan’s Nikkei Stock Average advancing +0.9% as a weaker yen boosted shares of exporters.

In Europe, regional bourses have opened higher, following yesterday’s record close stateside. The utility sector has dragged the Stoxx Europe 600 into the black, while commodities are trading mixed in the FTSE 100 with copper prices trade higher while Brent and WTI consolidate near flat on the day.

Note: U.S. markets are closed today for Thanksgiving holiday and are due to reopen tomorrow.

Indices: Stoxx50 +0.2% at 3,041, FTSE -0.1% at 6,811, DAX +0.3% at 10,689, CAC-40 +0.3% at 4,544, IBEX-35 +0.3% at 8,655, FTSE MIB +0.3% at 16,587, SMI +0.4% at 16,598, S&P 500 Futures +0.1%

2. Crude prices capped, metals in demand

Oil prices are little changed overnight as uncertainty ahead of a planned OPEC-led crude production cut at next week’s Vienna meeting (Nov 30) and thin liquidity trading conditions is dissuading investors from making any new bets.

The market is expecting a deal from OPEC, but fear the aim, proposed by Algeria, of cutting production by -4 to 4.5%, or over -1.2m barrels per day may not be reached. Currently, the deal’s success hinges on an agreement from Iraq and Iran.

Brent crude futures are trading at +$48.98, up +3c, while West Texas Intermediate (WTI) crude is at +$48.02 per barrel, up +6c from yesterday’s close.

Gold is down -0.3% at +$1,184.48 an ounce after breaking below the psychological +$1,200 level for the first time in nine months earlier this week. It’s currently heading for its biggest monthly drop in 36-months.

Base metals continue to surge on Trumponomics. Copper has rallied +3.5% in early trade, extending their gains to new yearly highs, while zinc is heading for its strongest levels in six-years.

3. Bond rout on hiatus

Sovereign bonds are taking a breather from their 11-day selloff driven by Trump’s “reflation” trade.

After yesterday’s FOMC minutes, fed fund futures are pricing in a +95% possibility for a rate hike on Dec 14.

U.S 10’s are trading atop of +2.35% with some investors seeing value at current levels, believing that the past fortnights sell off from +1.86% is a tad overdone.

Note: U.S bond market will be closed today for Thanksgiving.

Elsewhere, yields on 10-year Aussie and Kiwi bonds backed up +5bps. In Europe, regional bonds remain under pressure on rumors that ECB may lend more bonds to avert a market freeze. 10-year German bunds have backed up + 5 bps to +0.261%. Italian debt prices remain vulnerable to referendum polls.

4. EM central banks under pressure to react

**Turkey raises benchmark Repo Rate to +8% or +50bps TRY rallies to $3.37**

Turkey’s central bank announces its rate decision this morning and the possibility of a +25bps rate rise to +7.75% would not be too much of a surprise. A token move by Turkish authorities could dent the USD/TRY’s bullish momentum temporarily ($3.4190), but also indicate that they mean business, after a series of record highs reached on broad ‘big’ dollar moves and concerns about Turkey’s politics.

Not in a too dissimilar situation is the INR ($68.83) – it’s heading towards its own record low outright, on the flight of capital out of Indian shares and bonds. Its record closing low of $68.85 was in Aug 2013.

5. German Ifo points to better growth for Q4

German business sentiment was steady in November, a sign that the country’s economic upturn remains intact.

The Ifo business climate index came in at 110.4 this month, unchanged from October and broadly in line with expectations. Note: the October figure was revised down from 110.5.

The Ifo institute said “the German economy seems to be unfazed by the election of Donald Trump as U.S. President.”

Companies were more satisfied with their current business situation, but trimmed their outlook for the coming six months. In the manufacturing sector, this was due to “less dynamic export prospects.”

Germany’s GDP grew +0.2% in Q3, or an annualized rate of +0.8% – the lowest expansion rate in a year and well below the U.S.’s annualized growth rate of +2.9%.

Most private-sector economists expect a slight pickup in German GDP growth in the fourth quarter, but caution that the risks of heightened protectionism under a Trump presidency as well as the U.K.’s pending exit from the European Union threaten to dent Germany’s export prospects.

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