Investors Reign(deer) in Gains and Losses During a Holiday-Shortened Week

The holiday-shortened week consolidates dollar gains and sterling losses

The US dollar’s gains scored yesterday in the wake of a strong upward revision in Q3 GDP to 5% pared slightly today in extremely thin market conditions.  The euro sold to a new 28-month low (~$1.2165) yesterday and is struggling to re-establish a foothold above $1.22. 

Encouraged by the US GDP, US rates backing up and a 1.25% rise in the Nikkei, the dollar is above JPY120.25 today. Recall that the greenback hit a low of nearly JPY115.50 on December 16.  Yesterday the dollar stalled just above JPY120.80, which is about one yen off the multi-year high set on December 8.  

Sterling is also consolidating its loss seen yesterday amid the contrasting Q3 GDP reports. While the US was revised higher, the year-over-year pace in the UK was cut to 2.6% from 3.0%.  The dollar-bloc currencies are slightly firmer. 

Despite the weaker oil prices and S&P’s warning that there is a 50% chance Russia could lose its investment grade status in the next three months, the ruble is slightly firmer day. The focus is on a modest form of capital controls (forcing 5 state-controlled companies to repatriate their FX holdings by March 1) and the government’s offer of hard currency loans to Russian banks and businesses to service external debt.  The contagion has spilled over to Belarus.  Separately, the Chinese yuan also stabilized after falling to six-month lows.   Liquidity conditions have eased as the IPOs launch and/or tie up fewer funds than projected. 

The MSCI Asia-Pacific Index rose about 0.6%, helped by that advance in the Nikkei, and gains in Korea and Taiwan. China’s Shanghai Composite fell 2% after losing 3% yesterday.  Reports suggest light suasion by Chinese officials have helped spark the profit-taking after a 30% rally from the unexpected PBOC rate cut on November 21 through December 22.  Not all European bourses are open, and those that are, are mixed.  The FTSE and CAC are about 0.25% lower, while Italy’s market is up over 1%.  

Activity in the bond markets is subdued and European benchmark 10-year yields are mostly at record lows. We see bigger moves at the short-end as cash parks for the holidays.  Seven Eurozone members have negative two-year yields.  US yields are moving in the opposite direction. The US 10-year yield reached almost 2% on December 16 and is now 2.25%, a nearly three week high.  The US 2-year yield was just below 48 bp December 16, and now it is near 75 bp.  

Oil prices are lower following the API inventory report.  US session features weekly initial jobless claims.

Market Turns Quiet, Consolidates is republished with permission from Marc to Market

See also: A Tone of Consolidation Ahead of the Holiday