Tech Sell-Off Continues
Today’s Financial Markets Highlights
• The USD sits in the fulcrum between the high beta levered for growth currencies like the dollar bloc, Norwegian krone and sterling and the funding currencies like the euro, Swiss franc, and yen.
• The dollar initially rose above JPY115 for the first time since March 2017, while Tokyo was on holiday, but risk-off drive has pushed it back below the threshold.
• Better than expected EMU flash PMI is helping euro steady after it initially fell to almost $1.1225.
• The Turkish lira is in a practical freefall, dropping 9% today after depreciating for the last 10 sessions.
• Observers may have exaggerated the link between the sharp US bond and tech sell-off and the nomination of Powell for a second term.
• US Treasury comes back with a 7-year note sale and a re-opening of a two-year floater after yesterday’s soft reception to sale of 2- and 5-year notes.
The markets are unsettled. Bond yields have jumped, tech stocks are leading an equity slump, and yesterday’s crude oil bounce reversed. Gold, which peaked last week near $1877, has been dumped to around $1793. The tech sell-off in the US carried into the Asia Pacific session, and Hong Kong led most markets lower. The local holiday let Japanese markets off unscathed, though the Nikkei futures are off about 0.4%. Australia and India managed to post minor gains as the MSCI Asia Pacific Index fell for the fourth time in five sessions. Europe’s Stoxx 600 has slid around 1.5% today, its fourth consecutive decline, but has clawed back nearly half the gains It is the longest retreat in two months. US futures are lower, with the NASDAQ leading the move. Near 1.64%, the US 10-year yield is at the upper end of this month’s range. Last month it reached 1.70%. European bond yields are mostly 4-6 bp higher, and peripheral spreads have widened a little. The dollar is sitting in the middle of the major currencies. The dollar bloc, sterling, and the Norwegian krone, which are the risk-on, levered to growth currencies, are weaker. The euro, yen, and Swiss franc are little changed but firmer. The dollar briefly traded above JPY115.00 in Asia, without Tokyo, before being pushed back. The steady euro has taken some pressure off most of the regional currencies. The Turkish lira has been in a virtual freefall following President Erdogan’s spirited defense of his efforts to drive down rates. There was around 10 lira to the dollar in the middle of November. Today, at its peak, there is about 12.48 lira to the dollar.
Over the weekend, Japan expressed willingness to cap its strategic reserves. Press reports indicated yesterday that India is amenable to coordinating a release of some of its oil stocks. South Korea may also participate. It has been under consideration for a couple of weeks, at least, in the US, and China appears willing to repeat September’s release of crude from its reserves. However, it seems naive to have expected OPEC+ to simply standby. January WTI posted a bearish outside down day ahead of the weekend by trading on both sides of the previous day’s range and settling below the previous session’s low. Follow-through selling yesterday took it down about $1.20 from the close, but when OPEC+ announced that a coordinated release of the oil could prompt it to reconsider its own plans. It is to meet next week to review its strategy. Through yesterday’s low, January WTI had retreated by nearly 11% from the October 25 higher near $83.85. A band of resistance is seen between $78 and $80.
OPEC+ had previously agreed to boost output by 400k barrels a day per month to restore pre-pandemic output levels. That said, not all the members can produce their quota, leading to a shortfall. OPEC+, the IEA, and EIA all seem to agree that supply-demand considerations shift in next year, and the market will once again be in oversupply. Moreover, OPEC+ argues that the real dislocation is not with oil as its with gas. The US imports about 2.9 mln barrels a day, India, about 4.2 mln, and Japan, about 3.1 mln barrels a day. South Korea imports around 2.5 mln barrels a day. Together it is around 12.7 mln barrels a day of imports. If together, 100 mln barrels are released, about eight days of imports would be covered. This is a high estimate. India, for example, has indicated it may release 5 mln barrels.
Australia’s flash November PMI was better than expected. Manufacturing edged up to 58.5 from 58.2, while services rose to 55.0 from 51.8. This produced a 55.0 composite reading, a gain from 52.1 in October. Recall, the pandemic and lockdown led weakness in the economy in the May-August period. The composite PMI bottomed in August at 43.3. It has risen for three months but remains well off the peak in April of 58.9. Separately, New Zealand real retail sales were hit in Q3 by the social restrictions, but the drop was not quite as bad as feared. Reall retail sales fell 8.1% after a 3.3% increase in Q2. Economists (Bloomberg median) had anticipated a 10.5% pullback. The RBNZ meets the first thing tomorrow and is widely expected to hike 25 bp, to lift the cash rate to 0.75%. There is still a slight bias toward a larger move in the swaps market.
The dollar briefly traded above JPY115.00 for the first time since March 2017. We note that Japanese dealers were on holiday and did not participate in the move. As risk-off sentiment took over, the dollar was sold back to JPY114.50. Resistance in Europe has been found near JPY114.80. Note that there is an option for about $980 mln at JPY115.50 that expires tomorrow. The Australian dollar initially edged lower to almost $0.7210, its lowest levels since October 1 before steadying. A break of $0.7200 signals a retest of the late September low near $0.7170. Initial resistance is seen in the $0.7230-$0.7250 area. The PBOC is sending plenty of verbal signals that it does not want to see strong yuan gains, and today’s fixing underscores that point. The dollar’s reference rate was set at CNY6.3929, wider than usual above the market expectation (Bloomberg) for CNY6.3904. The greenback is firm inside yesterday’s range. Caution is advised here as the PBOC could escalate its disapproval.
The flash EMU November PMI was better than expected. The aggregate manufacturing PMI rose to 58.6 from 58.3. The market anticipated a decline. The service PMI rose to 56.6 from 54.6, also defying expectations for a sequentially weaker report. The composite snapped a three-month slide and rose to 55.8 from 54.2. The cyclical peak was in July at 60.2.
A flash release is made for Germany and France. Germany manufacturing slowed slightly (57.6 from 57.8) and held up better than expected (Bloomberg median 56.9). Services actually improved (53.4 from 52.4). The composite rose to 52.8 from 52.0 to end a three-month downdraft after peaking in July at 62.4. French numbers were even better. The manufacturing PMI rose to 54.6 from 53.6. The service PMI rose to 58.2 from 56.6. The composite improved to 56.3 from 54.7 to snap a four-month fall. Recall that yesterday the Bundesbank warned that the German economy may practically stagnate this quarter and that inflation may approach 6% this month.
The UK’s flash PMI was more mixed. The manufacturing PMI had been expected to have slowed but instead improved for the second consecutive month (58.2 from 57.8). Services were nearly as weak as anticipated slipping to 58.6 from 59.1. The composite eased slightly to 57.7 from 57.8, ending a two-month recovery from the June-August soft patch. Meanwhile, Prime Minister Johnson’s rambling speech yesterday hurt people’s ears, and in terms of substance, the changes to social care funding that may result in lower-income people having to sell homes to pay for support did not go over well. It is spurring talk of a possible cabinet reshuffle.
The euro has edged to a new low for the third session today, slipping to almost $1.1225 before catching a bid that lifted it back to $1.1275. There is an option for around 765 mln euros at $1.1220 that expires today. The nearby cap is seen in the $1.1290-$1.1310 area. The euro may struggle to sustain upticks ahead of tomorrow’s US PCE deflator report (inflation to accelerate). Sterling met new sellers when it poked above $1.3400. It has ground lower in the European session, and sterling fell to almost $1.3355. Note that the low for the year and month was set on November 12, slightly above $1.3350. We see little chart support below there until closer to $1.3165.
We suspect many pundits exaggerated the link between the renomination of Powell for a second term and the sell-off in US debt and technology shares. First, it was not a surprise. Second, it assumes a substantive difference in the conduct of monetary policy between Powell and Brainard. There isn’t. The difference was on regulatory issues and on the role of climate change. Third, the idea that the Fed may accelerate its bond purchases next month was sparked by the high CPI reading on November 10. Yesterday, Bostic joined fellow Fed President Bullard. Two governors (Clarida and Waller) also seem to be moving in that direction (Waller may be faster than Clarida). The fact or the matter, nearly all of the high-frequency data for October, including employment, auto sales, retail sales, industrial production, and inflation, came in higher than expected. The US sees the preliminary November PMI today. It is expected to have risen for the second consecutive month after fall June-September.
The reception to yesterday’s US two- and five-year note auctions was relatively poor. The higher yields (compared with the previous auctions) did not produce better bid-cover ratios. Today’s the Treasury comes back with $55 bln seven-year notes and re-opens the two-year floater. Many observers see the debt ceiling constraint being likely an early 2022 problem rather than this year. Still, tomorrow’s sale of the four-week bill may be the test. Recall that at last week’s auction, the 4-week bill yield doubled to 11 bp.
Europe’s virus surge and social restrictions became a market factor last week. Many think that the US is a few weeks behind Europe. The seven-day infliction rate in the US rose 18% week-over-week. Several states, including Colorado, Minnesota, and Michigan, are being particularly hard hit. Nationwide 59% of Americans are reportedly fully vaccinated. However, it leaves about 47 mln adults and 12 mln teens unvaccinated.
The risk-off mood and the drop in oil prices are helping the US dollar extend its gains against the Canadian dollar. The greenback, which started the month below CAD1.24, is now pushing close to CAD1.2750 to take out last month’s high. A move above here would target CAD1.28 and then the September high near CAD1.2900. Still, the market is getting stretched, and the upper Bollinger Band is slightly below CAD1.2730. The risk-off mood does not sit right with the Mexican peso either. The dollar settled above MXN21.00 yesterday, its highest close in eight months. The same forces have lifted it to MXN21.1250 today. However, the anticipated gain in September retail sales (0.8% Bloomberg median after a flat report in August) may not give the peso much support if the risk-off continues. The high for the year was set on March 8 near MXN21.6360.
Bannockburn Global Forex