The Greenback Remains Resilient As The Bulls Drive Equities Higher

Overview: Equities have charged higher, and the greenback is mostly firmer. News that Draghi may become Italy's next Prime Minister has boosted Italian bonds. The PBOC unexpectedly drained liquidity, and this may have deterred buying of Chinese stocks, a notable exception in the regional rally. It stopped last week's four-day slide with a three-day advance, so far. Europe's Dow Jones Stoxx 600 gapped higher for the second session and is up about 0.7% in around midday. The S&P 500 gapped higher yesterday and may try to close last week's gap (~3836.8-3847.8). US Treasury yields are firm ahead of today's refunding announcement, and the 10-year is around 1.12%. Core European bond yields have edged higher, but the peripheral yields, led by Italy's nine basis point decline, are softer. The greenback is mostly firmer, though the Antipodeans are resilient in the European morning. The $1.20 level held in the euro on the initial test. Emerging market currencies are mixed, with the central European complex a little softer. The four-day advance in the JP Morgan Emerging Market Currency Index is at risk. Gold is pinned near yesterday's lows (~$1830). Resistance is seen in the $1845-$1850 area. A further drawdown in US and China oil inventories is helping crude prices consolidate near the recent highs. For the March WTI contract, this means hovering around the $55 a barrel level, the highest in a year.  

Asia Pacific

Japan's January services and composite PMI readings were revised slightly higher, but both remain below 50 and weaker than in December (at 46.1 and 47.1, respectively). The composite has not been above 50 since last January. Of note, in the composite, new orders fell to 46.5 from 47.5, and it is the 12th month below 50. The employment component was at its lowest level since last August.

Australia's final PMI was revised slightly lower, but both remain well above 50 at 55.6 for services and 55.9 for the composite. The services PMI is better than December's 52.0 reading, but the composite is lower than December's 56.6 reports. Tomorrow, Australia reports trade figures, but the impact of China's "punishment" may continue to be difficult to detect in the aggregate data. RBA Governor Lowe defended the asset purchase program and cautioned against prematurely withdrawing support. He claimed that it has helped lower interest rates and weaken the Australian dollar. Rising house prices are drawing official attention, and it is watching lending standards, which speaks to macroprudential measures if necessary, not rate hike.  

China's Caixin service and composite PMI were lower than expected at 52 and 52.2, respectively (down from 56.3 and 55.8). This, coupled with the "official" PMI, suggests that the world's second-largest economy's recovery is moderating. It is too early to draw policy implications, but looking ahead, next week's January CPI reading may turn negative, and this could help ease concerns that the PBOC is preparing to hike interest rates.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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