PBOC Sends Signal As Market Looks Past Impeachment Vote

Overview: The US dollar is regaining ground lost in yesterday's setback against the major currencies. Sterling is the notable exception. It was toying with the $1.37 area, perhaps helped by the Governor of the Bank of England signal that there still are hurdles to adopting negative interest rates, which the futures market is still discounting for as soon as midyear. The US 10-year yield that reached 1.18% yesterday before slipping is now back to around 1.12%, which has taken off pressure from the other major bond markets and yields a little lower. Even in Italy, where the government is stressed by Renzi's threat to withdraw support, a softer yield is seen today. Similarly, a rising tide lifts most equity markets today. Nearly all the markets but China and Hong Kong rose in the Asia Pacific regions, led by more than 1% gains for the Nikkei and Taiwan. European shares are mostly higher, including Italy. US shares are extending yesterday's gain. Gold recovered off the dip below $1820 on Monday, but it appears to be stalling near $1863.The 200-day moving average is found a little below $1842. Helped by another inventory drawdown signaled by the API estimate, oil prices are extending their advance for the seventh consecutive session, its longest advance in two years. February WTI approached $54 a barrel, a new high. It had finished last year near $48.50.  

Asia Pacific

As hinted yesterday, Japan has expanded its state of emergency to seven more prefectures beyond the Tokyo area.  The state of emergency now covers an area that accounts for a little more than half of the nation's GDP. This will prompt economists to slash their forecasts for Q1 GDP. A contraction of around 3.0%-3.5% at an annualized rate looks more likely now. Currently, the emergency protocols are expected to last until February 7. This will do no help for Prime Minister Suga's public support that is waning. There is criticism that the government was too slow in declaring an emergency, and the vaccination program is not expected to start until late next month, adding to the angst. The BOJ meets next week and is now likely to cut its economic assessment.  

The turmoil in Washington last week prompted the US State Department to cancel planned foreign trips. This included a planned controversial visit to Taiwan by the US Ambassador to the UN. That visit has been canceled. The US State Department's lifting of restrictions on interacting with Taiwan, days before Biden's team is sworn in, spurred consternation in Beijing and increased cross-straits tension. Meanwhile, the arrests of 55 activists and politicians in Hong Kong last week have been widely condemned, but some reports suggest more arrests are likely in the near-term. Some have been critical of the new EU-China investment agreement struck at the end of last year. On the other hand, if Europe and the US are going to have a more coordinated response, the argument goes, Brussels needed the agreement to be on equal footing with the US that has the Phase 1 agreement in hand. 

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Read more by Marc on his site Marc to Market.

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