Tuesday December 20: Five things the markets are talking about
Volatility across regional indices and major currency pairs remains seasonably compressed despite the geopolitical nerves in Europe.
Sovereign debt saw a relatively strong bid over the last session on heightened geopolitical risk – a Russian ambassador was shot and killed by an off-duty policeman in Turkey in defiance of Russia’s involvement in the Syria conflict. In Germany, a suspect terror attack, reminiscent of the Nice France truck attack (July, 2016), has left at least a dozen dead, while in Switzerland a lone gunman was shot and killed after an attack on a Mosque in Zurich.
The yen, one of the go-to currencies of choice during risk aversion, has fallen outright overnight (¥118.01) ahead of the U.S open after the BoJ, last of the Tier I central banks, held policy steady, shedding some gains made following the European attacks.
1. Global bourses edge higher despite political risks
A positive outlook on the economies of the U.S., Germany and Japan has helped global indices to look beyond Europe’s geopolitical risks.
With Fed Chair Yellen’s speech Monday rather bullish – the U.S to grow strongly – has led to a return of the risk-on trade in the market overnight despite the terror attacks over the past 24-hours.
In Japan, the Nikkei Stock Average closed up +0.5%. The Aussies ASX 200 closed out +0.5%, while Korea’s Kospi added +0.2%. The outlier was Hong Kong’s Hang Seng Index losing -0.6%.
In Europe, equity indices are trading higher, consolidating around last weeks rally highs ahead of the U.S open. Financial stocks are leading the gains, while energy, commodity and mining stocks are trading generally lower.
U.S futures are set to open in the black.
Indices: Stoxx50 +0.3% at 3,265, FTSE -0.1% at 7,009, DAX flat at 11,423, CAC-40 +0.3% at 4,836, IBEX-35 +0.4% at 9,373, FTSE MIB +0.7% at 19,093, SMI +0.3% at 8,261, S&P 500 Futures +0.1%
2. Crude prices under pressure on position paring
Oil prices have eased as investors and dealers unwind positions in the run-up to the holiday season.
Brent futures fell -0.2% to trade at +$54.81, while U.S. light crude (WTI) slid -0.4% to +$51.91 per barrel.
With no fundamentals available to drive large price swings, both investors and dealers should expect the remainder of this week to be rather tepid.
The future direction of oil prices depends on OPEC’s and non-member compliance to last month’s agreement to a cut in global production. Producers are expected to adhere to a cut of almost +1.8m bpd in oil output from January 1.
Safe haven gold, which rallied +0.4% yesterday, has pulled back -0.3% overnight to +$1,135.06 an ounce, as the prospect of further U.S. rate hikes outweigh political concerns.
3. Global yields “too and fro”
Yesterday, sovereign yields fell after the biggest six-week selloff in more than seven-years pushed yields higher. Geopolitical news added to the demand for haven bonds.
Overnight, the U.S 10-year note yield has backed up to +2.574% from +2.544% Monday, when it declined for the first time in eight-days. German bund yields have inched up to +0.264% from +0.255%, while Italian yields have jumped to +1.880% from +1.822%.
Also this morning, the Italian government has requested parliamentary permission to issue up to +€20B in additional debt, setting up a possible move to help its troubled banking sector.
4. Dollar shrugs off Euro terror risks
The ‘mighty’ dollar has maintained its firm tone ahead of the U.S open mostly supported by Fed Chair Yellen’s comments yesterday where she observed the U.S jobs market being its strongest in nearly a decade and that economic gains were finally raising most living standards.
USD/JPY is up +0.76% at ¥118.01, with the yen falling after the BoJ retained its ultra accommodative monetary policy. Governor Kuroda also highlighted the benefits of a weaker yen to Japan’s economy. Expect the market to focus on last week’s multi-month peak of around ¥118.65 for conviction of a sustained dollar rally.
Elsewhere, Europe’s single unit, the EUR, is down -0.15% at €1.0384, nearing last week’s low of €1.0365, while the U.K pound is down -0.3% at £1.2350.
5. No holiday shock from the BoJ
There were no surprises from the BoJ overnight which kept its policy steady for Interest Rates (NIRP), QQE and Yield Control (YCC) – short-term IOER (interest on excess reserves) was left at -0.1% while the target rate on the 10-year JGB’s was kept at around 0% despite a minority view that it could be raised to reflect the recent jump in global yields and lower rates.
Also as speculated in the Japanese press, the BoJ raised its assessment for overall economy as well as the Exports component, noting continued moderate recovery trend (prior acknowledged sluggishness) and a pick-up in shipments.
Japanese inflation expectations are still deemed to be in “weakening phase”, and the outlook for inflation remains to be slightly negative or about 0% due to effects of decline in global energy prices.
BoJ also noted that the overall forex trend was one of stronger USD, not yen weakness. Policy makers do not believe that their domestic currency had excessively weakened (only at levels from earlier this year).
Note: Since the U.S election the yen is down -12% outright.