It was clear out of the gate that investors were in “risk-on†mode yesterday, not wanting fundamentals to slow down their campaign to push equities in the US to new all-time highs. Despite worse than expected readings from the Dallas Fed Manufacturing Index and the Flash Services PMI, the S&P managed to ramp to new all-time highs before settling just south of these levels at 1,847; the commodity complex also had banner day, with oil and gold both up around 1% on the session. Price action on the VIX curve saw the front-end dampened as equities shot up in the early afternoon, with the cash market dropping to just above 14% although the offer tone was less apparent in the longer-dated tenors.
The commodity-correlated currencies were well bid throughout the day, favoured by traders as a “risk-on†proxy by which to chase higher yields, as the Aussie regained the 0.9000 handle against the USD despite reports earlier in the day that some state-owned banks in China are restricting lending to the property sector. The Loonie was able to claw back a good portion of last week’s losses, with the bears trimming some of their short positions after comments from Bank of Canada Governor Poloz on the weekend during the G20 summit lessened the likelihood the central bank would get more dovish on the outlook for inflation at their March meeting. We would note that while USDCAD has come off over a full cent from the high’s witnessed last Friday, the data from last week fails to dramatically alter the narrative for the economic outlook in the region, with the BoC continuing to remain data dependent. The inflation data has comforted Poloz slightly with some of the transitory softness dropping off, but retail sales confirmed the economy was on unstable footing heading into the end of 2013, which will most likely be established with a slight slowing of GDP growth when figures are released at the end of this week.
Also interesting as an aside, rock-star economist (if there was such a thing he would be one of them) Nouriel Roubini was speaking in Toronto yesterday, and advocated that a further weakening of the Loonie would be beneficial for the manufacturing sector. After pointing out that the sky is blue (no offense) Roubini stated that an additional depreciation of 10% in the Loonie would help the export sector, and suggested the Bank of Canada should take a more accommodative stance to monetary policy in order to keep the currency weak and insulate the economy from a possible correction in the housing market.
The overnight session was a rocky one in Asia, with Japanese equities positing a nice follow through to the price action seen on Wall Street to finish up by 1.44%, while the situation in China continued to deteriorate as the Shanghai Comp fell over 2%, marking almost a 10% tumble in the past week. The catalyst for the persistence of the capital flight in China was the central bank tightening liquidity in the interbank lending market, as the Peoples’ Bank of China drained CNY 100bn via 14-day repo transactions. In addition, the revaluation of CNY has not lost any steam, with USDCNY reaching its highest level since August 2013 overnight, increasing speculation the central bank is engineering a temporary correction aimed at shaking out some of the highly-leveraged carry trades designed to profit on interest rate differentials and the steady appreciation of the yuan. If the goal of the PBoC was to introduce volatility into the currency market as a way of readying investors for a widening of the CNY trading band by Q2, it has definitely worked; the offshore Chinese renminbi has continued its depreciation against the USD, and currently sits at 6.1218.
News flows have been sparse throughout the European session, although the spill-over effects of China are causing equities to take pause on mainland Europe. The Dax is outperforming its regional peers by only being down 0.52% as we near the midway point of the European trading day, able to deflect some of the broader market pessimism on the confirmation that German GDP grew at a rate of 1.3% on a y/o/y basis in December. The EUR is slightly stronger against the USD, yet holding its gains in the mid-1.37s as market’s look towards money supply and the flash estimate of inflation in February to hit the wire later this week.
Heading into the North American open, equity futures are displaying a moderate weight to the tape, with investors looking to take a hiatus before potentially testing out another intraday all-time high in the S&P. Commodities are feeling the pressure of the fall-out in China and the weakness in the renminbi, as front-month WTI gives up all of yesterday’s gains to change hands in mid-$101/barrel range, while Copper also gets squeezed and is off by almost 1%.
The Loonie is struggling to maintain ground against the USD before the opening bell, weighed down by the events in China and corporate profits in Canada remaining subdued in the fourth quarter of 2013. Operating profits increased by 0.8% from Q3, a faster clip than the downwardly revised figures of 0.2% in the previous quarter.
The remainder of the session is fairly light in terms of tier-one economic data for North America, although there are a few pieces of data market participants will be keeping an eye on. The Case-Shiller House Price index for December is set to be released at 09:00 EST, with expectations the prices of single-family homes on a y/o/y basis would slow to 13.3%. Housing data in the US for January was soggy across the board, with weakness seen from everything from permits, to existing home sales. Although a colder than expected winter on the east coast has notably dampened traffic, most of the softness has come on the west coast of the US, so it will be interesting to how prices held up into the end of 2013. While it likely decreased demand due to weather could also lead to a weaker print for the Case-Shiller index today, some of the supply issues noted by builders should help prop prices up in the medium-term, helping to bolster consumer equity, and thus retail demand.
Also on the docket is consumer confidence for February at10:00 EST, with the median analyst forecast suggesting the indicator ebbed slightly lower to a round figure of 80.0. If the print comes out in line with expectations that will still be some of the best levels seen over the last six months, and with equity prices rebounding nicely since the beginning of February, it is likely financial confidence among households remains decently supported in February. With the FOMC minutes from last week reiterating a drastic change in assessment for the outlook of the economy would have to take place before the Fed considering delaying its taper trajectory, a solid number from consumers on their outlook for economic conditions should result in positive price action for equities, while being supportive for the American buck in favour other developed-market currencies. We should note that there will come a time where good economic data in the US once again becomes a positive for the Canadian unit, the relative speeds of the economic recoveries are such that with Canada lagging the US (likely the case in 2014), the correlation likely won’t develop until later in 2014.Â
Therefore, corporations that are naturally short the USD in terms of their business operations should be watching for any softness in US data to cover off some of their near-term exposure, as we are still in an environment that favours buying USDCAD on its dips. Make sure to speak with your dealing team before the latter half of the week, as with an absence of domestic Canadian data the Loonie could be in a holding pattern untilFriday, with the potential for a sharp move after the GDP numbers are released.
Further reading:
Housing data
The EUR is slightly stronger against the USD
