The “big” news overnight should have been Chinese FX reserves just like China should be back in the global spotlight more generally as it becomes increasingly apparent that the PBoC is leaning towards financial stability at the possible expense of growth (i.e. they’re in tightening mode).
Overnight we learned that Beijing’s FX reserves fell below the magic $3 trillion mark last month.
The offshore yuan dipped the most since January 18 after the numbers were released.
But it kind of feels like no one really cares. There’s too much going on politically in the US and Europe. It’s hard not to crane your neck when you’re driving by the aftermath of a car accident and similarly, we can’t take our eyes off the slow motion trainwreck unfolding across Western democracies. Sorry China, your ongoing economic and financial crises will just have to wait. Here’s SocGen’s take:
Surprisingly, Chinese FX reserves fell in January, albeit only by USD 12.3bn, to USD 2.998trn. So the magic $3trn level is broken, but only symbolically. The market expected a rise in reserves on valuations, and even a small fall is a sign that the Chinese are still intervening to support the Yuan. Or manipulating it higher, if you will. Not important today, as the bullish dollar consensus is bashed, but important in the longer run, as Chinese capital flight is going to continue and the authorities will need to allow the currency to take some of the strong by weakening further in due course.
But back to what “matters.” The euro fell to its lowest level against the dollar in a week as markets grapple with Marine Le Pen’s euroskeptic rhetoric and an increasingly tenuous situation for Angela Merkel ahead of German elections later this year.
As Bloomberg reminds us, “the Netherlands will hold general election in March, the French are due to choose a new president in April, and Germany will have a federal election in September [as] nationalists including French National Front leader Marine Le Pen and Geert Wilders of Dutch Freedom Party are seeking to build on Trump’s surprise victory last November.” As a reminder, Geert Wilders is perhaps the most batsh*t crazy of all the batsh*t crazies. He once advocated locking all male refugees in asylum centers in order to, and this is a direct quote, keep the “Islamic testosterone bombs” away from European women.
Anyway, we also saw some macro- related selling of EURJPY, according to Asia-based FX traders. EURJPY is down 1.6% this week, and touched 119.54, its lowest level in 2 months.
Speaking of the yen, that’s where the action is. Recall that on Monday, we got a little early week “yen-sanity” shortly after lunch. As I put it, “watch that Trump/Abe meeting later this week because I can promise you everyone trading the yen will be tuned in.” Here’s SocGen again, with a bit more:
The S&P which is doing a better impression of going nowhere than at any time since the 1960s, drifted lower yesterday evening. That was all it took to take 10-year Treasury yields back under 2.4% and 10year real yields back under 40bp (38bp if we’re being fussy). The result of these moves was that USD/JPY, which was already flirting furiously with December’s lows, broke through – and looks unencouraging on a chart to put it mildly. A combination of two factors were at play. Firstly, the continued reaction to Friday’s US labour market data and the softness of wage growth in particular. For everyone who cites Nairu and Phillips curves, another can point to underemployment, a reservoir of ageing but otherwise healthy people who need to earn something, and most of all, technology wage-earners still have precious little bargaining power. Secondly, consensual trades that didn’t work in January are being cut back – especially the short duration ones which suffer negative carry. What we’re left with is more of the same as last week – a market lacking genuine ‘new news’, and a continued correction of the postelection moves in bonds and USD/JPY in particular. The US economic calendar throws up the trade balance today and if that isn’t ignored, it will be because the Trump Administration uses it as another rock to throw at trade surplus nations’ currencies.
For his part, Bloomberg’s Richard Breslow says we should be paying more attention to widening spreads in the EU. “I can’t help but feel it wasn’t really the yen I should be watching unless you are pricing in some event risk for the Abe visit to the White House this Friday,” Breslow wrote this morning, adding that his “takeaways for what may have more lasting consequences were the shocking widening of core as well as peripheral sovereign spreads in Europe and how quietly well the dollar has been trading.” Here’s how the broad dollar is holding up:
“The greenback strengthens against all major currencies as traders report that leveraged investors bought the dollar into the rally, with the euro hobbled by political risks,” Bloomberg wrote about an hour ago, recounting the overnight action.
We’re going to need more Peter Navarro.
Moving on the equities, things were quiet in Asia. The Nikkei was of course weighed down by the stronger yen.
- MSCI Asia Pacific down 0.3% to 142
- Nikkei 225 down 0.3% to 18911
- Hang Seng down less than 0.1% to 23332
- Shanghai Composite down 0.1% to 3153
- S&P/ASX 200 up 0.1% to 5622
Meanwhile, in Europe, German IP plunged the most since 2009 on what analysts are calling “seasonal factors”:
European stocks are higher despite the political risk, likely getting something of a boost from the weak euro.
- Stoxx 600 up 0.4% to 363
- FTSE 100 up 0.6% to 7216
- DAX up 0.4% to 11557
- German 10Yr yield down 1bp to 0.36%
- Italian 10Yr yield down 3bps to 2.35%
- Spanish 10Yr yield down less than 1bp to 1.78%
- S&P GSCI Index up less than 0.1% to 396.9
In the US, we’ll get the following data on Tuesday:
- 8:30am: Trade Balance, Dec., est. -$45.0b (prior -$45.2b)
- 8:55am: Redbook weekly sales
- 10am: JOLTS Job Openings, Dec., est. 5.580m (prior 5.522m)
- 3pm: Consumer Credit, Dec., est. $20.0b (prior $24.532b)
- 4:30pm: API weekly oil inventories
The trade balance should give Trump something to tweet about. Also – and this should be super fun – Trump education pick Betsy DeVos faces a tight Senate vote today. Hopefully no grizzlies will show up to disrupt the proceedings.
- US 10-yr yield up less than 1bp to 2.42%
- Dollar Index up 0.77% to 100.68
- WTI Crude futures down 0.3% to $52.84
- Brent Futures down 0.3% to $55.53
- Gold spot down 0.5% to $1,229
- Silver spot down 0.8% to $17.60