Friday January 13: Five things the markets are talking about

The “mighty” Dollar has managed to regain some of its recent lost ground overnight against the majors, with dip buying kicking in after the greenback’s retreat following President-elect Trump’s news conference on Wednesday.

Since November, the dollar has been on a upward tear, supported by investors’ hopes for fiscal stimulus, deregulation and tax cuts to lead to U.S economic growth, faster inflation and a potentially quicker pace of interest-Rate hikes by the Fed. However, with no new information forthcoming from Trump on economic policies this week, the dollar has been aggressively sold.

Will the dollar close out the week with a loss? This morning, investors’ focus will be on U.S December retail sales (08:30 am EST). Dollar ‘bulls’ could be in for a disappointment as the bar is set relatively high – consensus expects a +0.7% m/m.

Note: Markets are also waiting for key earnings from U.S banks – JPM, BAC and WFC.

1. Equities close out the week on a sour note

In Asian, equities have ended the week broadly lower, as markets sought direction after largely trending Higher in the New Year. It seems that investors prefer to take the wait and see approach to ‘Trumponomics’ after the mid-week disappointment of lack of information.

Regional losses were led by Aussies ASX 200, which dropped -0.8% for the third consecutive day. Korea’s Kospi fell -0.5% lower after the BoK held rates steady and the NZX-50 eased -0.2%.

However, Japan’s Nikkei Stock Average was an outlier, as the day’s best performer, reversing most of the previous sessions -1.2% decline as the dollar regained some traction outright (¥114.65). Also in the black was Hong Kong Hang Seng Index gaining +0.5% on the back of energy names.

In China, December y/y export data fell a bigger-than-expected -6.1% in dollar terms last month. This put pressure on the Shanghai Composite Index, which ended down -0.2% to post a fourth-straight decline.

In Europe, equity indices are trading higher after Fed Chair Yellen provided some optimism overnight stating the economy is doing well and faces no serious obstacles in the short-term. On the Eurostoxx, financials are trading higher across the board, while construction stocks, with commodity and mining stocks also trading notably higher, are supporting the FTSE 100.

U.S futures are set to open in the black.

Indices: Stoxx50 +0.5% at 3,306, FTSE +0.4% at 7,323, DAX +0.5% at 11,578, CAC-40 +0.6% at 4,893, IBEX-35 +0.4% at 9,441, FTSE MIB +1.2% at 19,391, SMI +0.5% at 8,414, S&P 500 Futures +0.1%

2. Oil prices looking for traction, gold books winning week

In Asia, crude oil prices were supported by the weaker dollar as well as news that the Saudis have cut oil output to its lowest in almost two years, and plan further reductions. However, this support is starting to look rather tenuous in European trading ahead of the U.S open.

Brent crude is down -0.1% at +$55.95 a barrel, while U.S. light crude (WTI) is also down -0.1% at +$52.97.

Investors lingering doubts over the extent of OPEC production cuts, and concerns over the health of the Chinese economy (earlier reported the steepest falls in exports in seven years) should provide a short-term cap for crude prices.

Gold ($1,196.70) has slipped ahead of the U.S open after hitting a seven-week high in Thursday’s session, as the dollar edged up. Nevertheless, the yellow metal is on track to end higher for a third consecutive week.

Note: Bullion on Thursday touched a high of $1,206.98, its best since Nov. 23.

Also making waves is silver, it hit a high print of $16.92 on Thursday, its best since December 14. The metal is also on track for a third consecutive week of gains.

3. Sovereign yield curves flatten

Sovereign bond markets continue to retrace from their yield highs set in the middle of last month.

The strong correlation between the ‘mighty’ U.S dollar and U.S. Treasury bond yields continues to stand firm as both are heading lower to close out this week – DXY is almost off -1%, while U.S yields extend their longest downturn in six-months.

The U.S 10-year is set to open flat at +2.36%, recovering from yesterday’s six-week low (+2.315%). But it’s down more than -5 bps on the week and around -26 bps (+2.60%) since the Fed raised interest rates in mid-December.

Elsewhere, the yield on Aussie 10-year government debt added +2 bps to +2.68%.

4. The ‘Big’ dollar comes up short on the week

With one week to go before Trump is to be inaugurated as the 45th President of the United States, the USD remains on the defensive, licking its wounds after Trump’s mid-week news conference provided very little insight on his policies.

The EUR/USD continues to hover in the mid-€1.06 in quiet trade as dealers wait for commentary from Canada’s rating agency DBRS report on Italy later today – its expected to be a close call on a potential downgrade into “junk” status.

TRY ($3.8100) is under pressure again, falling -0.9% after yesterday’s +2.8% surge outright. The currency is down -4.2% this week after touching the lowest point on record. It’s rumored that the CB is implementing measures to force financials to borrow at a higher rate.

In China, the offshore yuan (¥6.8491) has extended it gains for a third day. Apparently China has asked some banks to stop processing cross-border yuan payments until they balance inflows and outflows.

Note: Chinese authorities are stepping up its campaign to curb a record amount of money leaving the country in the local currency.

Ahead of the U.S open, the yen (¥114.60) has taken this week’s gain to +2.1%, the best performance since the end of July.

5. BoK stands pat, cuts growth

Overnight, the Bank of Korea (BoK) left its seven-day Repo Rate (RR) unchanged at +1.25% (as expected) for its eight straight pause in the current easing cycle.

The decision to keep rates unchanged despite cutting economic-growth forecasts suggests that Korean policy makers considers the current rate levels low enough to support growth.

Futures prices indicate that dealers expect rates to remain on hold for 2017.

Holding pat would also hint that the BoK is concerned about potential capital outflows, especially ahead of extra rate hikes from the Fed.