Dollar Consolidates And Equity Rally Stalls

Overview: The US dollar is firmer against most major and emerging market currencies. The yen is a notable exception, and it is firmer, but well within recent ranges. The dollar-bloc currencies and the Norwegian krona are the weakest of the majors as a setback in equities and oil reflects a diminished risk appetite. The IMF revised down its global GDP forecasts yesterday, and a press report emphasizes the lack of progress in US-China trade talks on intellectual property rights and non-tariff barriers. All the large markets in Asia fell today. The Dow Jones Stoxx 600 ended a four-day advance yesterday and is little changed today. It has not fallen in back-to-back sessions since Jan 2-3. The S&P 500 gapped higher last Friday and has a four-day rally in tow. It is called about 0.5% lower. Weaker equities and heavier crude oil prices are underpinning bond prices. Benchmark 10-year yields are mostly softer. 

Asia Pacific

The Bank of Japan's meeting concludes tomorrow, and Governor Kuroda will hold his press briefing. The on-the-run benchmark 10-year JGB again offers a negative yield. The economy contracted in Q3 and appears to have rebounded slightly in Q4. Price pressures, when stripped of energy and fresh food rose 0.3% in December 2018 year-over-year, the same as in December 2017.  It stood at 0.1% in December 2016. The modest reduction of bond purchases has had a little apparent impact on yields. Kuroda may be asked about the surge in the yen at the start of the year. Contrary to some speculation, the BOJ refrained from intervention. The OECD's model of Purchasing Power Parity has the yen about 10% below fair value. The shift away from material intervention in the foreign exchange market and the desire to avoid antagonizing the US ahead of trade talks later this year kept the BOJ on the sidelines, but Kuroda may provide more color.  

Over the past week, two press stories on the US-Chinese trade talks captured the market's imagination. First was a report that the US Treasury was pushing for some relaxation of tariffs to induce China into deeper reforms, while the Trade Representative office was pushing back. The reported was denied by the Treasury Department and President Trump himself.  Still, it struck a responsive chord among many observers as Treasury Secretary Mnuchin is seen as a leading voice of the globalists in the American First Administration, while Trade Representative Lighthizer towing a harder line. Yesterday's NY Times casts doubt on progress on deeper structural issues, despite being told by the President that trade talks are going well. Also, news that the US is proceeding with the extradition of the Huawei CFO from Canada is seen as unhelpful for the trade talks. Other companies who violated US trade embargos, as Huawei is accused of, typically face fines not individual arrests. 

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Read more by Marc on his site Marc to Market.

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