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#Post#: 255--------------------------------------------------
A Day of Reversals
By: Marc Chandler Date: December 9, 2014, 6:46 am
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What can't go up forever apparently won't, and today has seen a
couple violent moves. The dollar, which has risen by more than
10% against the yen since the BOJ surprised with a 5-4 vote to
accelerate its already aggressive monetary easing on October 31,
rose to new multi-year highs yesterday just shy of JPY122 sold
off to reach almost JPY119.50 today.
There was not a fundamental trigger, though the sell-off in
global equity markets may have encouraged the some
profit-taking. Much of the pressure, however, appeared to stem
from crosses, especially the dollar-bloc. A poor business
confidence survey saw the Australian dollar fell to $0.8225, and
fueling more calls for rate cuts next year.
Chinese stocks also staged a dramatic reversal. The Shanghai
Composite, which extended its recent moon-shot initially by
taking on another 3% to bring the gains since the last November
surprise rate cut to nearly 27%, reversed sharply to close 5.4%
lower on the day. It was led by a 7.5% drop in financials, and
almost as large a drop in the energy sector. Regulators have
been warning about investors getting ahead of themselves in
recent day. Earlier today, regulators tighten collateral rules
for equity margin. No longer can AA rated bonds or lower be
used for collateral to buy stocks. This effectively drained
liquidity, though the PBOC itself refrained from open market
operations.
The yuan itself sold off sharply. It has declined by 1% since
the end of last week. The dollar reached CNY6.2080 today, the
highest level since July. The recent low was set at the end of
October near CNY6.1080. China reports inflation and lending
figures tomorrow. Barring a significant surprise, many
participants will continue to look for a near-term cut in the
reserve requirements.
Ideas that the UK economy was enjoying new momentum late in the
year were stopped cold by the disappointing industrial
production and manufacturing data. October industrial
production and manufacturing were expected to have both risen by
0.2%. Recall the October manufacturing PMI rose to 53.3 in
October from 51.6 in September. Today the UK reported
industrial output fell by 0.1% while manufacturing output
slumped 0.7%. The implied yield of the December 2015
short-sterling contract is nearly 10 bp higher than yesterday.
UK gilts are outperforming.
Separately, BRC sales were stronger in November rising 2.2%
year-over-year after a 1.4% increase in October. Like-for-like
increased 0.9% after a flat October. Also, MPC member Weale,
who has favored an immediate hike in rates, reiterated his
hawkish stance. The other dissenting hawk McCafferty speaks
Thursday.
Greek bonds are also staging a dramatic reversal today.
Ten-year bonds yields had approached 8.5% in late November, but
by the end of last week, yields had slumped to near 7.15%. The
yield has jumped back toward 7.70% today. Greek stocks have
slumped more than 8%, led by financials (-11%). The trigger
was Prime Minister Samaras decision to bring forward the
selection of the next Greek president. Opposition parties will
try to prevent Samaras from gaining the sufficient
super-majority needed to do so, and this would force elections
early next year. Syriza, which is anti-austerity, and most
recently pressing for official sector investor haircuts, is
running ahead in the polls. A January election, for example,
could influence the ECB to wait until its March meeting to
announce a wider asset purchase plan. It could be an awkward
time to buy Greek bonds, to say the least.
The Federal Reserve’s Labor Market Conditions Index deteriorated
in November (2.9 vs 3.9). This is followed by today’s JOLTS
report. It is not a market mover, and it will stand in the way
of rising confidence of the first Fed hike next year. The
immediate focus is on next week’s FOMC statement, where there is
growing speculation that the “considerable period” will be
dropped or modified. In fairness, many thought this was
possibly at the last meeting, but it is now understood that the
importance of the Fed press conference to help explain and guide
expectations. This is also why the first rate hike is also at a
meeting in which Yellen holds a press conference.
Marc Chandler
Marc to Market
www.marctomarket.com
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