Recovery Pauses in Europe

Asia followed suit, extending the recovery seen in the last couple of sessions to end last week.  Equities rose as did oil prices.   The MSCI Asia-Pacific Index rose 1.2%, and the Nikkei posted its first back-to-back gains this year.  Brent firmed, with the March contract trading to $32.80.  

However, in late-Asia and early Europe, the momentum fizzled.  Brent retreated $2 before finding support, and European equities edged lower before recovering in late-morning activity.  The Dow Jones Stoxx 600 is practically flat near midday in London, and the S&P 500 are steady to firmer.  

Core bond yields are softer though peripheral European bonds yields are mostly a little higher.  The prospects that the EU shifts its migration defense from the Turkish coast and the Aegean Sea to Greece's Northern border with Macedonia adds another weight on Athens and pushing up bonds yields sharply. 

The US dollar is somewhat softer against the euro, yen and Swiss franc, but firmer against the Canadian and Australian dollars.  It is mixed against the freely accessible emerging market currencies.    The euro had finished last week a little below $1.08.  Although it recovered, it has been unable to resurface above $1.0840.    Sterling peaked near $1.4360 before the weekend and struggled to sustain upticks above $1.4300 in Asia.  It spiked to $1.4235 in early European turnover, apparently awaiting fresh directional cues when US markets open.  

The greenback flirted with the JPY118.80 area that was seen before the weekend but failed to make much headway.  And when European markets struggled, and oil came off, the dollar was sold to JPY118.20, where new bids were found.   

Despite the market recovery faltering in Europe, we have not been dissuaded that a turn in the markets has in fact taken place.  The price action does not have the impulsive momentum that it did in the first two and a half weeks of the near year.    It is a better two-way market now. 

The economic news stream was limited.  There are two features, Japan's December trade figures and German IFO survey.   Japan's December trade surplus was bigger than expected at JPY140.2 bln.  The Bloomberg consensus was for a JPY117 bln surplus, after a revised JPY381.3 bln deficit in November.  

On a seasonally adjusted basis, the surplus was less than half the forecast at JPY36.6 bln, but the November deficit (JPY3.3 bln) was revised to a surplus (JPY22.4 bln).    Reports suggest the BOJ has been placing more emphasis on the seasonally-adjusted numbers recently. 

Exports fell for the third consecutive month on a year-over-year basis.  The 8% decline was larger than expected.  It is the largest decline since September 2012.    This is not simply a price effect.  Export volumes are 4.4% lower than a year ago.  It is the sixth consecutive month of declining year-over-year volumes.  Japan's reliance on exports is often exaggerated.  Exports account for about 18% of Japan's GDP, less than half of German, for example, and much closer to the US share.  Imports fell 18.0% year-over-year in December.  They fell every month last year, and the decline in energy prices played an important role.   

 The German IFO disappointed, but given poor start to the year and the immigration challenge, sentiment appears to be holding in fine.  The assessment of the business climate fell for the second month, and at 107.3 is the lowest since the middle of last year.  Last January it stood at 106.7.   The current assessment slipped to 112.5 from 112.8.  The consensus was for 112.6.  The expectations component fell to 102.4 from 104.6.  This is the lowest reading since August.  In January 2015, it stood at 102.0. 

Outside of the Dallas Fed manufacturing survey, the North American session looks quiet.  The FOMC and BOJ meetings are the main events of the week.    Draghi has put the ECB in play in March, and this serves as a backdrop.   Chinese officials have continued to help engineer a stable yuan.  Oil prices are still a wild card.  A break of $30.75 in the March light sweet crude contract would suggest potential toward $30.15 and then $29.50.  Only a break of this latter retracement objective would be worrisome. 

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