December 1, 2020 by Mark Coe

PMI week

• U.S. calendar has manufacturing ISM, construction spending, auto sales
• Canada calendar focuses on Q3 GDP, expected to rebound 48.0%
• Dollar and yen softer, Kiwi dollar hit 1-yr high vs yen, amid risk-on positioning
• European stock markets have rallied after a strong close in Asia
• UK final Nov manufacturing PMI revised up, to 55.6 from 55.2, up from 53.7 in Oct
• German Nov unemployment rate unexpectedly dropped to 6.1% from 6.2%
• Eurozone final Nov manufacturing PMI revised up to 53.8 from 53.6
• RBA left policy settings unchanged, as widely expected
• China manufacturing PMI rose to 54.9 in November from 53.6
• Japan Nov manufacturing PMI at highest level since Aug 2019

 

North American Open

Treasury Outlook (December 1)

It was a November to remember for Wall Street as the S&P 500 and Russell 2000 recorded their best November ever, climbing 10.75% and 18.29%, respectively. The Dow rallied 11.84% on the month for its strongest November since 1928, while the NASDAQ was up 11.8% for its best since 2001. Positive vaccine news provided a lot of the underpinning, but the ongoing Fed accommodation also supported. For the year-to-date, however, the NASDAQ has been the big winner with a 35.96% surge thanks to the strength in the stay-home shares. The S&P 500 is up a very respectable 12.1%, while the Dow is in positive territory with a 3.86% increase as the vaccine developments provide hope for a return to normalcy sooner than later. Treasuries were little changed with the long bond closing at 1.570% and the 10-year at 0.844%, while the 2-year was at 0.147%, well off of the cheapest levels on the month. The calendar heats up and will be heavy for the rest of the week, concluding with the November jobs report. Today's slate has the November manufacturing ISM, expected to slip to 57.5 from 59.3. October construction spending should rise 0.8% from 0.3% previously. November auto sales will trickle out through the session. For Fedspeak, the focus will be on testimony from Fed Chair Powell on the CARES Act. In his prepared remarks released Monday afternoon he will say that vaccine news is very positive for the medium term, but warned there are still significant challenges and uncertainties, including the timing, production, distribution, and efficacy across different groups. He also noted that the economic improvement has moderated and the outlook remains "extraordinarily uncertain." Other Fedspeakers include Brainard, Williams and Daly are on deck. The earnings calendar features Salesforce.com, Bank of Nova Scotia, Bank of Montreal, Veeva Systems, Trip.com, HP, and NetApp.  

Canadian Market Outlook (December 1)

Canada's GDP expected to rebound 48.0% in Q3 after -38.7% Q2 plunge A busy calendar is on tap in Canada this week, contrasting with the nearly blank docket last week. Q3 GDP, September GDP, November employment and October trade will provide insights into the size of the rebound in Q3 and the impact of the spike and infections and renewed restrictions that began in October and accelerated in November. Q3 GDP (Tuesday) is expected to rebound 48% after the -38.7% plunge in Q2 that came as the economy was nearly shut down. September GDP is seen rising 0.9% after the 1.2% bounce in August. Employment (Friday) is projected to rise 40k in November following the 83.6k gain in October. The unemployment rate is seen at 8.8 from 8.9%. The trade deficit (Friday) is anticipated to narrow to -C$3.0 bln in October from the -C$3.3 bln shotfall in September. The Q3 productivity report (Wednesday) is also due out this week. While the relative deluge of data is of interest, we suspect it will not materially change the outlook for moderation in Q4 growth due to the fresh restrictions that have come as virus cases pick-up, followed by a return to "normal" next year as the vaccine takes hold. Notably, there have been whispers that the economy could be setting up for a surge in inflation if demand returns quickly next year -- something the BoC is likely to monitory closely.

FX Overnight

FX Update (December 1)

EUR-USD has settled lower after yesterday posted a three-month high at 1.2004. Strong Chinese manufacturing PMI data -- as in best-in-10-years strong -- catalysed a resumption in risk-on positioning in global markets, which saw the dollar, along with the yen, come under pressure, with the effect of lifting EUR-USD form its correction low at 1.1924. EUR-USD's 30-month peak seen in early September is at 1.2012. Market participants will be mindful that the pair has consistently failed to sustain gains above the 1.1900 level for almost four months now. There aren't many strong prevailing reasons to bullish on the euro, too, given recession bound eurozone nations, which are underperforming the U.S. and Asian economies, strong dovish bias at the ECB, the 750 bln euro EU recovery fund being delayed by a dispute with Poland and Hungary. One positive has been the recent outperformance of European stock markets relative to global peers. We still anticipate the euro gaining versus the dollar and yen while underperforming against more cyclical currencies, which hinges onrisk appetite holding up in the months ahead. This seems reasonable, given optimism for a vaccine-facilitated return to economic normality in 2021, or something approaching it, alongside massive liquidity from world central banks and prospects of more fiscal stimulus in major economies. Negative real interest rates in the U.S. and the Fed's codified lower-for-longer policy rubric are considerations, along with the U.S. deficits and capital seeking higher returns in buoyant global markets. The pound came under pressure after Cable traded above 1.3400 for the first time in three months. A high was left at 1.3406 before the pair dropped quite sharply. The correction low so far is 1.3342. The high was a reflection of broader dollar weakness, while the drop has been a reflection of broader pound weakness. These dynamics come with market participants continuing to wait for a concrete development from the EU and UK future relationship negotiations. Just last week today, December 1, was being touted as the deadline, though now the latest deadline is reportedly this Saturday, while there have been reports that the European parliament could convene as late as December 28 to ratify a trade deal. Germany's Merkel has been putting the pressure on EU states to reach a deal with the UK. Fishing remains a key sticking point, though France's insistence that the current arrangement remains in place, which gives the UK only 18% of the catch from its own waters, is seen as unreasonable by the UK, naturally, but also many other EU states. Pressure on the UK government is intense. Brexit ideologues in PM Johnson's party are demanding that no quarter is given to the EU, while a leaked Whitehall document last week warned of a "perfect storm" of chaos in the event of a no-deal in the Covid-19 era. U.S. president elect Biden warned London that the scope for a deal with the U.S. would be compromised if there is a return of a hard border on Ireland -- which is what could happen in a no deal. What is clear, deal or no deal, is that EU and UK's relationship will be an ever evolving and complicated one when the UK exits its transition membership of the common market and customs union at year end. The UK wants to diverge from EU rules, while EU states are concerned that the UK will undercut their markets. The relationship will be subject to dispute arbitration with the possibility of retributive measures. This is why markets are anticipating only a narrow free trade deal, which would be centred on manufacturing. USD-CAD has dropped back under 1.2950, pulling lower from yesterday's rebound high at 1.3010, which was seen after the pair posted a 26-month low at 1.2922. The oil market will remain the dominant driver of USD-CAD, and we remain bullish of both oil and the Canadian dollar. Oil prices are up today after ebbing moderately over the previous few days. Strong Chinese manufacturing data boosted oil and other resource commodities. The OPEC+ group deferred a decision on output quotas until Thursday. The consensus expectation is for the group to refrain from rising output quotas for at least another three months from January, while a six-month extension is also being considered, which by its own analysis would likely swing the oil market back into supply deficit. Global stockpiles are high and demand for oil is set to be well below normal through the northern hemisphere winter due to Covid countermeasures, which are already tight in Europe and becoming more restrictive across North America and in the more northerly Asian countries. At the same time OPEC output has increased, with Libyan production having fully returned to pre-blockade levels. There is also a view that after the Covid pandemic has gone, oil will have a more elastic characteristic, with many developed nations likely to see a higher prevalence of working from home than before, reducing demand for fuel and enabling consumers of gasoline to reduce commuting days during times of oil high prices. These are motivating reasons for oil producing nations to keep supply restrained. Assuming quota discipline is maintained, the outlook is bullish for oil on the back of the increased optimism for a vaccine-assisted route out of the prevailing Covid situation. Consumers have built up savings and there is potential for a significant acceleration in global economic activity by mid next year. USD-CAD has been trending lower since March, and we anticipate there is more to come. USD-JPY edged out a five-day high at 104.46 before ebbing back to the lower 104.00s. Both the dollar and yen weakened amid a rekindling in risk appetite following strong manufacturing data out of China. Yen crosses lifted, though have remained off recent trend highs for the most part. One exception was NZD-JPY, which pegged a one-year peak. Regarding USD-JPY specifically, both currencies are viewed as safe haven, counter-cyclical currencies, which limits the direction scope for the pairing, though the real interest rate differential between the U.S. and Japan is a mathematical negative for the nominal exchange rate. Outside the case against the dollar, the yen is amid what we are tagging as a longer-term softening trend, especially against the cyclical currencies, including the dollar bloc. The yen's broader performance should continue to derive from the level of risk appetite in global markets. Japan's surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, has established the yen as a low-beta haven currency. To learn more about Mark Coe visit his profile here .

November 30, 2020 by Mark Coe

Key Drivers for the Week of Nov 30 - Dec 4 · Vaccine developments boost optimism, but virus a near term headwind · Wall Street rallied to record highs, Dow hit 30k on promising vaccines · Bond rates likely capped by ongoing central bank accommodation · U.S. employment and ISM reports likely to show some loss of momentum · Fed Chair Powell testifies on CARES Act Tuesday, Wednesday, · Canada monitors employment, GDP, and trade reports · Attention on Asian PMI reports from China, Japan, India, Korea · RBA expected on hold at 0.10%; RBI seen steady at 4.0% · Brexit uncertainties continue, ongoing risk of no-deal scenario · Eurozone releases PMIs, CPI, jobless, retail sales PPI · German HICP, unemployment, manufacturing orders awaited · Switzerland reports retail sales, inflation, KOF leading indicator, PMI  

Week Ahead: Game Changer?

On November 30, 2020

Equities rallied last week and have posted strong gains in November thanks to positive vaccine developments that should be a major game changer in 2021. Indeed, the increasing prospect that a distribution could begin as soon as early December have boosted optimism for a return to normalcy sooner rater than later. Investors have cheered and global stocks (ex-China) have posted double digit gains on the month even as record spikes in virus cases and more restrictive measures pose significant threats to the durability of the recovery. And even under the most optimistic vaccine scenarios, global economies will face a challenging winter. That realization, and ongoing central bank accommodation should cap bond yields if not knock them lower. There are plenty of key data reports this week, but amid the contrasting vaccine/virus dynamics, none are likely to alter general outlooks. On the other hand, a heavy slate of central bank speak that could provide clues on further accommodation. With Wall Street hitting fresh record highs last week, including Dow 30k, profit taking and month-end rebalancing could could weigh. However, dip buying should limit selling pressure. A lot of focus will be on the November nonfarm payroll report given renewed shutdowns and layoffs. ISMs and vehicle sales will also be monitored for further insights on the economy through November. Fed Chair Powell testifies to Congress, where he is expected to reiterate his call for more fiscal stimulus while maintaining that the Fed has plenty of tools remaining. A gaggle of ECB speakers are expected to maintain the message that economies still need substantial monetary and fiscal support, with the bank readying a package of measures for the December meeting. In Asia, Japan has its usual month end data dump while China releases the always closely followed manufacturing PMIs.  

NORTH AMERICA

The U.S. slate is heavy with data and Fedspeak that will provided timely insights into the impact of cross-currents at play in the economy during November. We'll also be monitoring retail sales as the holiday shopping season kicks off. We suspect pent up demand will be a major source of support. However, the November employment (Friday) will be front and center. We expect a 540k November nonfarm payroll gain, moderating from the increases of 638k in October, 672k in September, and 1,494k in August. The jobless rate should be steady from 6.9% in October, versus a 14.7% peak in April. Hours-worked are assumed to rise 0.5% after a 0.8% October gain, with the workweek steady at a 20-year high of 34.8 for a third consecutive month, from 34.7 in August. Concerns over the labor market have been stoked by rising initial claims that have suggested renewed restrictions are having a negative impact. ns are hampering the growth rebound. However, we'd caution that powerful seasonal patterns for claims between mid-November and late-January will be disrupted this year by the holiday behavioral shifts due to the virus, so we are hesitant to read too much into the two-week initial claims rise. The ISM reports are expected to indicate a loss of momentum heading into winter. The ISM manufacturing index (Tuesday) is expected to ease to a still strong 57.5 in November from a 2-year high of 59.3 in October. The index saw an 11-year low of 41.5 in April. The ISM services index should tick down to 56.5 from 56.6 in October, versus a 17-month high of 58.1 in July, an 11-year low of 41.8 in April, a 13-year high of 61.2 in September of 2018, and an all-time low of 37.8 in November of 2008. Other reports this week include auto sales (Tuesday), construction spending (Tuesday), initial jobless claims (Thursday), factory orders (Friday), and the trade deficit (Friday). Fedspeak will be of interest with Chair Powell headlining. He'll be testifying on the CARES Act on Capitol Hill, first to the Senate Banking Committee (Tuesday), and then to the House Financial Services Committee (Wednesday). We expect him to argue for more fiscal stimulus, especially with the expiration of more programs at the end of the year, and as the surge in virus cases and increased restrictions threaten the pace of the recovery. We do not expect him to give any indication, and front run the FOMC decision on QE at the December 15-16 meeting. The FOMC minutes from the November 4-5 meeting threw some cold water on expectations for a near term increase, though several policymakers have suggested they support more buying if the economy appeared to be stumbling and/or interest rates were rising. Other Fedspeakers include governors Brainard (Tuesday) and Bowman (Friday), along with presidents Daly (Tuesday), Evans (Tuesday), and Williams (Tuesday). The corporate earnings remain lean this week: Monday has BHP, Zoom, and Autohome. Tuesday brings Salesforce.com, Bank of Nova Scotia, Bank of Montreal, Veeva Systems, Trip.com, HP, and NetApp. On Wednesday, results are due from RBC, CrowdStrike, Synopsys, and Splunk. TD Bank, Dollar General, CIBC, Marvell Technology, Kroger, Cooper Companies, and Ulta Beauty are due Thursday. There are not any reports due Friday. A busy calendar is on tap in Canada this week. Q3 GDP, September GDP, November employment and October trade will provide insights into the size of the rebound in Q3 and the impact of the spike and infections and renewed restrictions that began in October and accelerated in November. Q3 GDP (Tuesday) is expected to rebound 48% after the -38.7% plunge in Q2 that came as the economy was nearly shut down. September GDP is seen rising 0.9% after the 1.2% bounce in August. Employment (Friday) is projected to rise 40k in November following the 83.6k gain in October. The unemployment rate is seen at 8.8 from 8.9%. The trade deficit (Friday) is anticipated to narrow to -C$3.0 bln in October from the -C$3.3 bln shortfall in September. The Q3 productivity report (Wednesday), Q3 current account (Monday), October industrial product price index (Monday) and October building permits (Monday) are also due out this week. While the relative deluge of data is of interest, we suspect it will not materially change the outlook for moderation in Q4 growth due to the fresh restrictions that have come as virus cases pick-up, followed by a return to "normal" next year as the vaccine takes hold. Notably, there have been whispers that the economy could be setting up for a surge in inflation if demand returns quickly next year -- something the BoC is likely to monitory closely.

ASIA

This week's calendar is very busy with key reports around the region with much of the focus on PMIs. Japan has its month-end data deluge that includes industrial production, retail sales, and unemployment. China's ecnomy remains at the forefront of the recovery and this week's reports on November manufacturing and services PMIs should confirm that. Elsewhere, production, trade, growth and price data populate the calendar. For central banks, Australia's RBA meets, with no change to the 0.10% OCR expected. India's RBI meets as well, also expected to leave policy unchanged at 4.00%. In Japan, it's a heavy slate of month-end releases. Preliminary October industrial production (Monday) is seen slowing to a 2.5% y/y pace from 3.9% previously. October retail sales (Monday) should see large retailers expand 5.0% y/y after a -13.9% rate of decline, and total sales increase 5.5% y/y following the -8.7% drop in September. October housing starts and construction orders are also due Monday. October unemployment (Tuesday) is expected unchanged at 3.0%, with the job seekers/offers ratio steady at 1.03. The Q3 MoF capex survey (Tuesday) is forecast at -14.0% y/y from -11.3% y/y. November auto sales are due Tuesday. November consumer confidence (Wednesday) is expected at 33.1 from 33.6. The November services PMI (Thursday) should dip to 48.3 from 48.7. China official November CFLP manufacturing PMI (Monday) is seen improving to 51.7 from 51.4. The November Caixin/Markit manufacturing PMI (Tuesday) is forecast rising to 53.9 from 53.6. The November Caixin/Markit services PMI (Thursday) is projected to dip to 56.5 from 56.8. South Korea October industrial production (Monday) is expected to slow to a 0.5% y/y pace from 8.0% previously, while revised Q3 GDP (Tuesday) is seen unchanged at -1.3% y/y. The November trade report (Tuesday) should see the surplus widen to $7.0 bln from $6.0 bln. November CPI (Wednesday) is estimated to have warmed to 0.4% y/y from 0.1%. October current account figures are due Friday. India's RBI meets (Friday) and is expected to leave policy unchanged, with the repo rate at 4.00%, where it's been since the 75 bp easing in March. Growth has been picking up steam of late, making further cuts unnecessary for now.   Thailand's October trade and current account figures are due (Monday). November headline CPI (Friday) is seen unchanged at -0.5% y/y. Indonesia November CPI (Tuesday) is estimated at 1.6% y/y from 1.4%. Hong Kong October retail sales (Tuesday) are seen falling -11.0% y/y from -12.9% on a value basis, and down -12.0% from -13.4% on a volume basis. Singapore November PMI is due Thursday. In the Philippines, November CPI (Friday) likely edged up to 2.6% y/y from 2.5% previously. Unemployment is due Friday. Australia's calendar has the RBA's meeting (Tuesday), expected to result in no change to the 0.10% rate setting. At the last meeting, the bank cut its key interest rate to 0.1% from 0.25%, as was widely anticipated. It also announced a package of measures designed to secure a rapid recovery from the crisis now that lockdowns have lifted. Governor Lowe appears before the House of Representatives Standing Committe on Economics (Wednesday). The economic data slate is busy this week, with Q3 GDP (Tuesday) highlighting -- we anticipate a 3.0% rebound after the -7.0% drop in Q2 (q/q, sa). Retail sales (Friday) are seen rebounding 0.3% in October after the -1.1% drop in October. The trade surplus is projected at A$6.0B in October from A$5.6 bln in September. The current account for Q3 (Tuesday), October building approvals (Tuesday) and October housing finance (Thursday) are also due out this week. New Zealand's docket has the trade price indexes (Wednesday) and building permits (Thursday). The next RBNZ policy meeting is February 24 of next year. Earlier this month, the RBNZ topped up stimulus with a new Funding for Lending Program to start in December, aimed at reducing banks' funding costs and lowering interest rates. The bank's economic projections were less pessimistic on growth and inflation and cut back the projections for peak unemployment. The cash rate was left unchanged at a record low 0.25% and the Large Scale Asset Purchase program remained at NZD 100 bln. The statement reiterated the commitment to use additional tools if necessary, but markets have started to price out expectations that the bank will move towards a negative rate regime next year, on the back of the less pessimistic outlook. The balance of risks remains tilted to the downside, but it seems that in the central scenario further rate action won't materialize.

EUROPE

Eurozone: euphoria over vaccine developments has eased somewhat amid the realisation that despite the progress, there remain open questions and that European economies are likely to face further misery over the winter and well into next year even under the most optimistic vaccination scenarios. At the same time, Brexit talks still don't seem to be going anywhere and the risk of a no-deal scenario remains on the table, which leaves markets cautious and the ECB on course to strengthen asset purchase and conditional loan programs at the December 10 meeting. With that in mind, comments from ECB officials including Lagarde ahead of the start of the blackout period ahead of the meeting will continue to sound dovish. Data releases this week are highly unlikely to change the ECB's dovish posture even if preliminary inflation data for November are likely to show a slight uptick in the headline rate. At an expected -0.4% y/y (median same), the German HICP rate (Tuesday) would still remain firmly in negative territory and the same holds for the overall Eurozone CPI (Tuesday), which is seen rising to -0.2% y/y from -0.3% y/y. Variations in energy prices continue to play a very large role in headline inflation numbers and Eurozone PPI (Wednesday) is expected to lift to -2.2% y/y, with officials concerned that the prolonged inflation undershoot will ultimately lead to a change in inflation expectations and real deflation down the line. Final PMI readings for November meanwhile are expected to confirm that lockdowns have plunged the services sector into a deep recession that is also dragging down overall activity, even if manufacturing continues to benefit from the ongoing recovery in major export markets and to a certain extent stock building ahead of the end to the U.K.'s transition period. The manufacturing PMI (Tuesday) should be confirmed at 54.8 and the services reading (Thursday) at just 46.9, which would leave the composite at 50.0, signaling stagnation. Against that background, the recovery in the labour market is likely to have come to an end again and we see the German sa unemployment number (Tuesday) rising by 10K in November, which should see the sa rate rising to 6.3% from 6.2%. The overall Eurozone jobless number is even more backward looking, but also expected to lift to 8.4% in the October reading from 8.3% in September. Eurozone October retail sales and German manufacturing orders for the same month are still expected to show improvements over the month, but with the former boosted by consumers preparing for lockdowns and the latter not reflecting the misery in the services sector. In our view, positive surprises will not change the overall outlook. There are once again plenty of ECB speakers, which are likely to collective stress that even with vaccines underway, economies will still need substantial monetary and fiscal support and that the ECB is readying a package of measures for the December meeting. A strengthening of PEPP and TLTRO programs remains the most likely scenario for the next meeting. U.K.: market participants have been continuing to wait in vain for a concrete development from the EU and UK future relationship negotiations. On Friday, the BBC cited an unnamed source saying face-to-face talks will take place in London over the weekend, though the EU's Barnier would not travel unless the UK changed its negotiating stance. Fishing and level playing field rules remain the major blocks. What is clear, deal or no deal, is that EU and UK's relationship will be an ever evolving and complicated one when the UK exits its transition membership of the common market and customs union at year end. The UK wants to diverge from EU rules, while EU states are concerned that the UK will undercut their markets. The relationship will be subject to dispute arbitration with the possibility of retributive measures. This is why markets are anticipating only a narrow free trade deal, which would be centred on manufacturing. Note that the EU is considering a stopgap measure for UK financial services to kick in on January 1. The European Commission reportedly told member states yesterday that a decision on equivalence won't be ready until next year (the UK financial markets must maintain equivalent rules to access EU markets).   Pressure on the UK government is intense. Brexit ideologues in PM Johnson's party are demanding that no quarter is given to the EU, while a leaked Whitehall document this week warned of a "perfect storm" of chaos in the event of a no-deal in the Covid-19 era. U.S. president elect Biden warned London that the scope for a deal with the U.S. would be compromised if there is a return of a hard border on Ireland -- which is what could happen in a no deal. In the no-deal scenario, the UK government would have the choice between respecting the withdrawal agreement it signed with the EU to maintain a free-flowing border on Ireland, at the price of imposing a border down the Irish Sea between Northern Ireland and the rest of the UK. Such a scenario would likely spark protests and quite possibly violence from loyalist militants, or break the EU withdrawal agreement, which would result in a hard Irish land border and a lot of bad faith between the UK and EU and the UK and the U.S., and quite possibly violence from republican militants. The stakes are high, which is why we expect a deal. The UK data calendar this week is highlighted by the BoE's monthly lending and money supply report, along with the final November PMI reports, which should affirm the picture of a double-dip recession-bound UK economy, albeit much shallower than the first recessionary dip that was seen earlier in the year. The UK is coming out of national lockdown on Thursday, with the exception of Northern Ireland, with localized tiered levels of restrictions to replace. The net effect will be increased economic activity. Switzerland: the Swiss data calendar is busy, featuring the latest reports for retail sales, inflation, the KOF leading indicator, and the manufacturing PMI survey. To read more about Mark Coe, read his profile https://asiacapmarkets.com/mark-coe-market-research-analyst   Please follow us on our socials:

November 25, 2020 by Mark Coe

Overnight Bullets Wall Street leads the pack

-Japan services PPI; Malaysia CPI; Thailand manufacturing production due

-Wall Street surges, Dow climbs over 30,100 on positive vaccine hopes

-Treasury's $56 bln 7-year auction solid, 0.653% stop, 2.37 cover ratio

-U.S. consumer confidence fell -5.3 points to 96.1 in Nov from 101.4 in Oct

-U.S. Richmond Fed index dropped -14 points to 15 in Nov from 29 in Oct

-U.S. FHFA house price index surged 1.7% in Sep; largest gain on record

-Wall Street stronger on vaccine optimism, Biden transition; Dow 30k

-Dollar bloc currencies firmer amid risk-positive positioning

-German Ifo index plunged to 90.7 - weakest reading since July

Asian Open

Asia Market Outlook (November 25)

Wall Street surged overnight, with the Dow surpassing the 30k mark. More good news on vaccine developments has underpinned gains amid hopes for a quicker than expected return to normalcy. Also the news that the Trump administration is working on a transition gave some relief, as did reports that Janet Yellen, a very well known quantity for Wall Street, would be nominated for Treasury Secretary. It's also expected that a Biden administration and Yellen Treasury would argue strongly for additional fiscal stimulus. The Dow's gains were across all sectors, but led by energy, materials, industrials, and financials. A hefty amount of sidelined cash is also expected to come into the stock market, though there is also expected to be some major rebalancing into year end. Core European bourses were all higher, with the FTSE adding 1.55%, the DAX up 1.26%, and the CAC 40 advancing 1.21%. Treasuries sold off on the strength in risk appetite and supply. The 30-year yield was over 5 bps higher at 1.60%, while the 10-year was up 3 bps to 0.882%. The 2-year was little changed at 0.162%. The curve widened to 72 bps from 68 bps Monday and 66 bps late last week. The 10-year Bund yield was up 1.1 bp at -0.56%, while the Gilt yield had lifted 1.1 bps to 0.327%. Eurozone peripherals outperformed thanks to dovish ECB comments and as risk appetite improved.

Today's regional calendar is light, but will reveal Japan October services PPI, which is expected to have fallen 0.5% y/y from 1.3% previously. Malaysia October CPI is estimated at -1.4% y/y, unchanged from September. In Thailand, October manufacturing production is anticipated at -2.0% y/y from -2.8%.

In Europe, the docket is empty.

The U.S. calendar is very busy as data was condensed ahead of Thursday's Thanksgiving holiday. The second Q3 GDP report is expected to improve to 34.1% from 33.1%. October durable orders are seen rising 1.0% from 1.9% previously. October advance goods trade report is expected to see the deficit widen to $81.0 bln from $79.4 bln. Advance October wholesale and retail inventories are due as well. Initial jobless claims are expected to fall to 720k from 742k, and continuing claims are seen at 6.000 mln from 6.372 mln. October personal income and consumption should see the former rise 0.1% from 0.9%, and the latter rise 0.6% from the 1.4% increase in September. October new home sales are penciled in at a 0.965 mln pace, versus 0.959 mln previously. The final November University of Michigan consumer sentiment index should improve to 79.0 from 77.0. Weekly MBA mortgage and oil inventory figures are also on tap. The Fed will release the minutes from the November 4-5 FOMC meeting. The earnings calendar is light and features reports from Deere & Co., and Trip.com.

FX Overnight

N.Y. FX Summary (November 24)

The Dollar ran higher into the N.Y. open and beyond on Tuesday, taking the DXY from 92.19 to 92.55. The USD advanced versus all the major currencies, seemingly on the back of the formal start to the transition to a Biden presidency. Gains were later partly reversed, perhaps as risk-taking levels surged. The DJIA headed over the 30k mark for the first time, as Wall Street rallied sharply. While the good news on vaccine developments has underpinned gains amid as quicker than expected return to normalcy. Additionally, the pick of Janet Yellen, a very well known quantity for Treasury Secretary, calmed fears of a more radical pick. It's also expected that the Biden administration and Yellen will argue for additional fiscal stimulus, which would be supportive of further stock and USD gains.

EUR-USD put in a choppy session, rising from near 1.1845 to 1.1895 in London morning trade, before falling to 1.1841 in early N.Y.. From there, the pairing bounced to 1.1885, then settled under 1.1870. The formal start of the transition to a Biden presidency improved USD sentiment, as did the appointment of Yellen to Biden's Treasury Secretary post, which calmed fears of a more radical pick, and upped the expectations that the Biden administration and Yellen will argue for additional fiscal stimulus, positive for Wall Street and the USD. EUR-USD has largely consolidated November's modest gains, with the 1.1900 level remaining as solid resistance.

After rallying to 1.3380 in London morning trade, Cable fell to 1.3293 in early N.Y., as a broad round of Dollar buying hit the market. The pairing later recovered to 1.3360 highs. EU and UK negotiating teams have been continuing discussions by video conference, with the deadline for reaching agreement, is reportedly now next Tuesday. Heads of state are now fully engaged. We fully expect that win-win will prevail, with both sides evidently striving to a avoid no-deal, even if it means some kind of fudged extension. JPMorgan analysts are less confident, but still give 80/20 odds for a deal, up from 66% odds for a deal they previously envisioned. France is the main 'bad cop' protagonist on the EU side, along with Spain to a lesser extent, which has a special interest about Gibraltar, threatening on numerous occasions to veto any deal if it doesn't get what it wants on fishing rights. The most likely outcome is a narrow trade deal.

USD-JPY rallied to seven-session highs of 104.76, up from 104.55 at the open, and overnight lows of 104.15. Dollar demand was a feature since London morning trade, seeing the greenback lifted against most major currencies. The start of the formal transition period to a Biden presidency appears to have given USD sentiment a boost, while hopes for a robust U.S. economic recovery in 2021, once Covid vaccines are rolled out appears to have helped the USD for now at least. USD-JPY support is at the 20-day moving average of 104.47, with resistance at the 50-day moving average at 104.95.

USD-CAD bounced from two week lows of 1.3010, trading to 1.3091 highs in early North American trade. The overnight move to the lows came as oil prices hit three-month highs, though broad USD buying stepped in ahead of the open, prompted by the formal start of the transition to a Biden presidency, and a market looking ahead to 2021, when vaccines should put an end to the pandemic. USD-CAD later did an about-face from early gains, retracing to 1.3018 lows in early afternoon. Oil prices advanced further, taking WTI crude over the key $45 level, while surging equities and general risk-on conditions supported the CAD as well. The overnight low of 1.3010 now marks support

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November 24, 2020 by Mark Coe

Asia-Session

Overnight Bullets

-Asia: South Korea consumer confidence; Hong Kong trade -Treasury's $57 bln 5-year sale mixed, tails to 0.397%, garners 2.38 cover -Treasury's 2-year auction decent but mixed results, record $56 bln at 0.165% -U.S. flash Markit PMIs climb, manufacturing index at 56.7, best since Sep 2014 -Wall Street firmer on third vaccine candidate optimism; Brexit progress -Treasuries cheaper amid rise in risk appetite and heavy upcoming supply -U.S. Chicago Fed national activity index rose 0.51 points to 0.83 in Oct -Brexit: Signs looking good for a trade deal, deadline now reportedly December 1 -Sterling up on reports of EU and UK drawing near to reaching a trade deal -Dollar, yen softer on risk-on theme; vaccine news, data and Brexit news in the mix - 2020 U.S. Holiday Sales Poised to Weather the Pandemic -A Brexit Deal Is Unlikely to Be the End of Trade Tensions -Growth Outlooks Hit By Second Wave

Asian Open

Asia Market Outlook (November 24)

Wall Street moved higher overnight, buoyed by news that AstraZeneca's Covid vaccine achieved efficacy of as much as 90% in late-stage trials (though it requires 2 doses for that efficacy). This particular vaccine is reportedly cheaper to produce and does not require super-cold temperatures to store it. That will make distribution to poorer countries much easier. U.S. data was supportive of stocks as well, as the November Markit PMIs came in better than expected. Core European bourses all closed fractionally lower after giving up the day's gains. Treasuries cheapened on the day due to the rise in risk appetite and as record coupon supply hit. The 30-year bond was up nearly 4 bps to 1.566%. The 10-year was 3 bps cheaper at 0.86%, while the just auctioned 2-year was at 0.170%, at a small loss from the 0.165% award rate. The curve bear steepened to 68.8 bps versus 66.3 bps on Friday. Core EGB yields moved higher in tandem with U.S. Treasury yields, as encouraging vaccine news and positive signals on Brexit helped to boost sentiment. The Gilt underperformed, with the rate rising 1.7 bps to 0.316%. The Bund edged up slightly to -0.583%. Eurozone peripherals traded mixed, with Italian and Greek 10-year bonds outperformed as ECB officials continue to signal a strengthening of the PEPP program in December. Today's regional calendar Today's regional calendar is light. Japan returns from Monday's holiday. South Korea reports November consumer sentiment. Hong Kong has October trade, which should see the deficit narrow slightly to HKD 12.2 bln from 12.7 bln. In Europe, Germany will reveal the 2nd releases of Q3 GDP, along with Q3 consumption, investment, government spending, and Q3 import and export figures. November Ifo business climate data are due as well. France has November business confidence and the November production outlook. In the U.K., November CBI distributive trades survey - realized is due. In the U.S., it's a heavier slate of data. November consumer confidence is expected to lift to 104.0 from 100.9. The November Richmond Fed index is forecast to have fallen to 16 from 29. the September FHFA home price index is due along with the September S&P/Case-Shiller home price index. Weekly chain store sales are on tap as well. The Treasury auctions $56 bln of 7-year notes and $24 bln of reopened 2-year FRNs. For Fedpeak, Bullard and Williams are on deck. The earnings calendar features reports from Medtronic, Vmware, Autodesk, Dell, Analog Devices, Best Buy, HP, Hormel Foods, Dollar Tree, Burlington Stores, J.M. Smucker, and Autohome.

FX Overnight

N.Y. FX Summary (November 23)

The dollar turned broadly higher in N.Y. on Monday, with the better Markit PMI outcomes providing the main driver. USD Short-covering was noted after the unit tumbled through much of the month of November. The DXY recovered from near three-month opening lows of 92.02 to 92.80. In addition, firmer Treasury yields gave some support to the Greenback. More positive vaccine news appears to have helped, as the FX market begins to look through the current spike in Covid cases to the spring when widespread vaccine distribution is expected, which will mark the beginning of the end of the pandemic. Wall Street was higher as well. EUR-USD fell from just over 1.1900 at the open to 1.1800, while USD-JPY rallied from 103.70 to 104.64. USD-CAD headed from 1.3047 to 1.3113, while GBP-USDD pulled back from near three-month highs of 1.3398 to 1.3264.   EUR-USD printed a seven-session low of 1.1800 in N.Y. morning trade, down from 1.1906 seen at the open, and marking the pairing's biggest down day in two-weeks. Better U.S. PMIs came to the Greenback's aid, and USD short-covering was reportedly a factor across all the major USD pairings. Next EUR-USD support comes at the 20-day moving average, currently at 1.1792, then the 50-day moving average at 1.1775. Resistance is at the earlier 1.1906 peak, then the November 9 high of 1.1920. Dollar gains drove Cable lower following strong U.S. data, which highlighted a notable growth advantage of the U.S. economy relative to the UK and European economies. Cable printed a near three-month high of 1.3398, later falling to 1.3264. Of note, the UK's preliminary November services and manufacturing data produced a much less severe drop in the composite reading than had been expected, though still signaled a contraction in economic activity.   USD-JPY rallied to one-week highs of 104.64, up from early lows of 103.70. Better Markit PMI numbers helped, sd did firmer Treasury yields, while short-covering from what were seen as oversold conditions supported as well. The pairing has traded through its 20-day moving average, currently at 104.45, and will now eye the November 17 peak of 104.64.   USD-CAD rallied on Monday, as the USD made broad gains. After opening at 1.3047, the pairing made its way to 1.3113 highs. Oil price gains along with a broadly weaker Greenback overnight saw USD-CAD under modest pressure. WTI crude traded over the $43 mark, while the DXY hit near three-month lows of 92.02 before recovering. More good Covid vaccine news helped the CAD some early on, though a broad round of USD short-covering later took the pairing higher.