U.S Dollar Shutdown

Friday January 19: Five things the markets are talking about

The U.S dollar again trades atop of its three-year lows against G10 currency pairs while Treasuries yields trade steady after yesterday’s bond selloff as capital markets weigh up the reality of potential U.S government shutdown and signs of domestic/global inflation picking up.

The once ‘mighty’ dollar is heading for a sixth week of losses before the federal spending authority is due to expire at midnight today Friday (12:01 am EDT).

European stocks are following their Asian counterparts higher while U.S futures point to small gains.

Global crude prices have extended their retreat from its three-year highs and gold has climbed for the first time in four-days to minimize its first weekly loss in six-weeks.

Beware: Germany’s SDP are holding their convention on Sunday Jan 21 on whether to pursue formal talks with Chancellors Merkel’s CDU-led bloc on forming a government. It could be a bumpy open in Asia for the EUR (€1.2266).

1. Stocks see the ‘light’

Overnight in Japan, the Nikkei share average edged up on Friday with financial stocks leading the gains after U.S yields backed up to three-year high yields. The Nikkei rose +0.2%, while the broader Topix gained +0.7%.

Down-under, Aussie shares edge lower as miners slide. The S&P/ASX 200 index fell -0.2% at the close of trade. It fell -1.1% over the week, a second consecutive weekly fall. In S. Korea, the Kospi gained +0.1%.

In Hong Kong, the Hang Seng ends at a new peak, up for six-weeks in a row. At close of trade, the Hang Seng index was up +0.41%. For the week, the index rallied +2.7%, while the Hang Seng China Enterprises index rose +0.65%.

In China, stocks scaled a two-year high after a solid GDP print Thursday. The Shanghai Composite index was up +0.41%, while the blue-chip CSI300 index was up +0.35%.

In Europe, regional indices trade higher across the board, tracking higher futures in the U.S, which have reversed earlier declines as the threat of a U.S government shutdown looms.

U.S stocks are set to open in the black (+0.3%).

Indices: Stoxx600 +0.4% at 400.3, FTSE +0.1 at 7712, DAX +0.9% at 13399, CAC-40 +0.5% at 5520, IBEX-35 +0.4% at 10470, FTSE MIB +0.6% at 23785, SMI +0.4% at 9491, S&P 500 Futures +0.3%.

2. Oil prices fall as U.S. output rise outweighs crude stock falls, gold higher

Oil prices are on the back foot ahead of the U.S open, which puts them on course for the biggest weekly fall in three months, as a bounce-back in U.S production outweighs the ongoing declines in crude inventories.

Brent crude futures are at +$68.70 a barrel, down -61c from Thursday’s close. On Monday, they hit their highest price in three-years at +$70.37. U.S. West Texas Intermediate (WTI) crude futures are at +$63.38 a barrel, down -57c from their last settlement. WTI marked a December-2014 peak of +$64.89 a barrel on Tuesday.

The IEA monthly report has maintained its 2018 global demand growth forecast, but has also seen a surge in non-OPEC supplies as prices rise – U.S and Canada.

Note: EIA data shows that U.S crude oil production stands at +9.75m bpd and expects this to soon exceed +10m bpd, overtaking OPEC’s Saudi Arabia and rivalling Russia.

Ahead of the U.S open, gold prices are trading higher (+0.1% at +$1,328.98 an ounce), supported by a weaker dollar and worries about a possible U.S government shutdown, but the precious metal is still on track for its first weekly drop in six-weeks. Yesterday, the yellow metal touched its weakest level since Jan. 12 at +$1,323.70, having fallen from recent four-month highs. Spot gold has fallen -0.8% so far this week.

3. Sovereign yields back up

Market optimism about global growth is finally having an impact on the bond markets. With investors factoring in the prospect of accelerating price increases is backing up sovereign yield curves. Yesterday’s sale of U.S bonds that offer a hedge against faster inflation attracted very strong demand.

Note: U.S Treasury +$13B 10-year TIPS drew +0.548% with a bid-to-cover of +2.69 – the strongest BTC since May 2014.

Better-than-expected growth numbers from China this week has also added to a slew of recent global data releases supporting the positive outlook. Next week two of the major G7 central banks will hog the limelight – Bank of Japan (BoJ) monetary policy decision and briefing on Jan. 23, while the European Central Bank (ECB) rate decision is on Jan. 25.

The yield on 10-year Treasuries increased +1 bps to +2.63%, the highest in more than three years. In Germany, the 10-year bund yield has gained +1 bps to +0.58%, while the U.K 10-year yield Gilt climbed less than +1 bps to +1.331%, the highest in a week.

4. Dollar Shutdown

The consensus is that the impact on the USD in case of a U.S government shut-down should be more pronounced this time compared with other times when the government stopped working, like in 2013 when the dollar’s reaction was relatively muted.

The dollar is already on the back foot on the uncertainty over whether the short-term funding bill to prevent a shutdown will be passed today with the EUR/USD rising +0.3% to €1.2272 and USD/JPY falling -0.4% to ¥110.63.

Note: The bill still needs to go through the Senate and the Republicans need at least nine Democrats to back it up. So far only one Democrat has said he will vote yes.

Sterling remains volatile after data this mornings disappointing U.K retail sales number (see below). GBP/USD is last up +0.1% at £1.3910, compared with £1.3933 before the data. EUR/GBP is up +0.2% at €0.8828, roughly where it was beforehand.

5. U.K retail sales had steepest December drop in seven years

Data this morning showed that U.K retail sales fell sharply in December; with Britons paring back their spending after taking advantage of “Black Friday” in November.

Monthly retail sales fell by -1.5% compared with the previous month. This was nearly double the decline anticipated by the street and the steepest monthly drop since June 2016, the month of the Brexit referendum, and the biggest decline for that month in seven years.

Note: The fall followed a +1.0% monthly increase in November, driven by Black Friday discounts as well as by Britons’ early Christmas purchases.

Compared with the same month a year earlier, sales grew by +1.4%.

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