Dollar and Equities Find Firmer Footing

As the 24-hour session has progressed, the US dollar and equities have stabilized and turned higher.  Indeed as US traders prepare to return, stocks and the dollars are trading near session highs.  Oil prices are also trading higher.  Core bonds are a bit heavier, and the US 10-year yield has moved back above 2.10%.   News that Libya declared force majeure at two of its oil terminals appeared to have turned the oil market around.  It had continued to fall in the early hours the UAE warned it was prepared for oil prices to slump to $40 a barrel. 

In early Asia, it had looked as if the market was going to pick-up where it left off last week.    The dollar fell to JPY117.80.  The Nikkei gapped lower and slipped through last week's lows.  It recovered though still finished 1.6% lower and just below the opening level.  

The record low turnout (~53.3%) in the Japanese elections tarnishes the victory of the LDP/Komeito coalition, which held on to its super-majority.  The LDP itself appears to have lost a few seats.  The main opposition party DPJ gained 11 seats, but its leader Knieda lost his seat.  Abe's public support is below 50.  The low turnout and the fact that the Communist Party doubled the number of seats (to 21) must be seen as a sign of dissatisfaction. 

If our assessment is correct, the key to Abe's agenda is the constellation of forces within the LDP itself.  Abe's reforms are likely to harm the interests of various traditional supporters of the LDP, including agriculture and manufacturers.  The cabinet represents the different stakeholders in the LDP.  The early indications of the direction of Abe's second (really his third) term may be seen in changes to the cabinet.  Early media reports suggest no cabinet reshuffle is likely.  This does not bode well for the third arrow of structural reforms.  

Japan also reported its Q4 Tankan Survey.   The key takeaway is that sentiment deteriorated, but spending plans accelerated.  Sentiment of the large manufacturers slipped to 12 from 13.  The consensus was for no change.  Their outlook for March also deteriorated (to 9 from 13).  Sentiment and outlook of the large non-manufacturers improved.  It was mixed among the small businesses.  Capex plans, however, increased to 8.9% from 8.6%.  The consensus anticipated a decline to 8.1%.  

The news stream from Europe is light.   The stabilization of oil prices appeared to have helped stabilize the equity market.  The Dow Jones Stoxx 600 is up about 0.6%, led by a 2% rally in the energy sector.  

Over the weekend, Bundesbank's Weidmann played down the need for sovereign bond purchases.  This is not surprising, but it means that the further decline in oil prices, and the BBK's halving of its German growth forecast has not altered his stance.  

 Also, an Italian papers provided a bit more color on the recent ECB votes.  They report that six or seven governors were opposed hardening plans to expand the ECB's balance sheet by a trillion euros.  Three who opposed, Weidmann, Lautenschlager, and Mersch have already been mentioned.  One Italian paper claimed that the Netherlands, Luxembourg, Estonia and Latvia were also opposed.  Liikanen is thought to be siding with Draghi.  Nowotny's opposition to sovereign bond purchases may have eased. 

Another twist to the plot.  The size of a new asset purchase scheme that is expected to include sovereign bonds is reportedly around 500 bln euros.  In addition, the idea is that Berlin's opposition to a small program is not expected to be fierce.  

Before the weekend Fitch cut France's credit rating to AA.  Investors have all but ignored it.  French bonds are off slightly but in line with Germany's.  We are talking about 1.5 bp on 10-year benchmark bonds.   France's 5-year CDS is up 1 bp to 47.7.  Greek bonds have stabilized after last week's rout.  A weekend polled showed that most do not favor national elections and Samaras had cut Syriza's lead in half to 2.5 percentage points.  The first round of the presidential selection process is on December 17.  It is inconsequential.  The third and final round on December 29 is key.  However, it is important that Samaras shows progress toward the 180 votes needed in the third round. 

The US session features the December Empire manufacturing survey (consensus is for 12 from 10.16 in November) and the national industrial production figures from November (look for a strong bounce after the disappointing 0.1% decline in October).  Manufacturing itself is expected to have risen by 0.7%, which would be the strongest since July).   The highlight of the week is the FOMC statement, updated forecasts and Yelle's press conference.  The focus is on how the "considerable time" forward guidance will be adjusted now that the asset purchases are complete. 

Dollar and Equities Find Firmer Footing Dollar and Equities Find Firmer Footing Reviewed by Marc Chandler on December 15, 2014 Rating: 5
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