January 10, 2018

Markets Today: 10 January 2018

Oil prices trade to a new three year high and excluding JPY, the USD is stronger across the board. Meanwhile, US equities have made new highs, yet again! and all major European indices closed in positive territory.


  • 10y UST yields have broken through the 2.50% mark for the first time since mid-March aided by yesterday’s BoJ decision to trim its longer dated JGB buying strategy while bond issuance and a jump in energy prices have also been factors at play.
  • Longer dated core global yield started to move higher after yesterday’s news that the BoJ had reduced its purchases of JGBs maturing in 10-to-25 years and for those in more than 25 years. The 5% reduction was interpreted by some as a sign that the BoJ may be considering pulling back some of its stimulatory measures. USDJPY dropped 60pips on the news and longer dated JGBs sold off. Bond issuance and spike in oil prices also played a role in the bond sell off with the move higher in US Treasury yields gathering momentum after the US open.
  • Reaction to the BoJ decision to trim its longer dated JGB buying programme looks over done to us. Longer dated yields have struggled to rise recently and the BoJ obviously sees a steeper curve as desirable. The BoJ remains an inflation targeting central bank and with inflation still lingering at around 1% and well below the “above 2% target”, the Bank is unlikely to take its foot from the easing pedal any time soon. Yield Curve Control has become the main policy tool and thus the quantity of JGB buying is more a matter of the shape of the curve rather than the yearly target of ¥80trn. All that said, the recent price action shows the market is very sensitive to any potential change in BoJ strategy.
  • As for the rise in UST yields, in addition to the increase in UST supply and high grade issuance, the rise in oil prices as well as solid economic data releases plays to the view that we may well be seeing a valid repricing in longer dated yields amid an improved growth outlook and higher energy prices. The move above 2.50% in 10y UST yields could be significant and herald a shift into a higher trading range and a steeper curve. Similarly, 10y bunds climbed 3.5bps overnight to 0.46% and over the past 12 months moves above the 0.50% mark have been short lived. Watch this space.
  • Looking at currencies, JPY is the G10 outperformer, up 0.37% against the USD. The pair currently trades at ¥112.67, after reaching an overnight low of ¥112.37. The recent move in USDJPY looks overdone and in our view the pair should be trading closer to ¥114 amid the risk positive environment and 10y UST yields above 2.50%.
  • In index terms the USD is 0.15% higher and DXY trades at 92.493. Barring JPY, NZD has fair the best amongst G10 currencies, down 0.17%, but as our BNZ strategist notes the kiwi has outperformed most of the crosses. AUD is down 0.27% with yesterday’s gains after the solid building approvals data quickly reversed overnight. After reaching an overnight low of 0.7808, the AUD now trades at 0.7820, its ninth consecutive day with a 78c handle.
  • Strong German industrial production (Nov 5.6% yoy vs 3.9%exp.) and EU unemployment rate unchanged at 8.7% were not enough to prevent the euro from drifting lower. After trading to an intraday high of 1.2052, the pair now trades at 1.1938.
  • The CNY weakened overnight after reports that the PBOC had made a technical change to how the CNY fix should be calculated by banks.  According to these reports, banks who submit CNY FX fixings will no longer need to apply a ‘counter-cyclical factor’ that was used to smooth daily volatility in the currency.  NAB strategists do not think  the change necessarily signals that the PBoC wants a weaker CNY, although it might suggest China is more comfortable with letting market forces dictate price action.

In other news/data releases

  • Special counsel Mueller has conveyed interest in questioning President Trump and according to news reports, the president’s legal team is discussing a range of potential options for the format. Meanwhile, president Trump reckons he would beat Oprah Winfrey, amid calls for her to race for the White House.
  • According to the FT, South Korea and North Korea have agreed to hold military talks, but  a joint statement released after Tuesday’s talks contained no mention of the North’s atomic-weapons program, and according to WSJ South Korean officials said Pyongyang’s delegates had voiced anger when Seoul broached the North’s weapons program.

Coming up:

  • Job vacancies is the domestic data release today, but it is unlikely to trouble the scorers. Instead focus in our session is likely to be on China’s PPI (4.8% yoy exp. vs 5.8% prev.) and CPI data (1.9%yoy exp. vs 1.7% prev.).
  • In Europe, UK activity and trade data should be of some interest ahead of the ECB account of the monetary policy meeting from December.
  • In the US, Fed Evans is on the speaking duties and according to media reports the White House is close to announcing the appointment of the new Vice-Chair of the Fed.

Please note: Markets Today full report  will be available from 15th January 2018

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