Global Shares Trade Mixed In Thin Holiday Trade; Yen Rises As China Rebounds

With most global market closed for Christmas holiday, and traders taking the day and the week off, global stocks traded mixed in thin, subdued conditions as the dollar dipped against the yen, with the USDJPY sliding for a fourth straight day to 117, while the EUR was flat at 1.0450, taking stock of the US 10Y yield which closed lower on Friday.

The Tokyo Topix index slipped 0.4% on trading volumes 40% below the 30-day average, while the Nikkei225 dipped 0.16% to 19,397. The Shanghai Composite Index erased a drop of as much as 1.3%, which had dragged it to the lowest level since October, closing 0.4% higher at 3,123 with construction stocks rebounding after the government said it aims to invest 1.8 trillion yuan in highways and waterways next year. Despite the rebound in stocks Chinese commodity futures tumbled, with coking coal closing 6.4% lower, coke lost near 6%, rubber and lead fell 5.1%, steel rebar down 3%. Adding to the concerns, Chinese liquidity continued to tighten, with Shibor mostly higher across the board, and the benchmark 3M index higher for the 48th consecutive day.

India’s Sensex Index resumed its decline, falling to the lowest in more than a month.

“There are technical indicators flashing certain signs, but there aren’t any events left this year, and I see 2016 ending with little disturbance, and small moves,” Seiji Iwama, a fund manager with Daiwa SB Investments Ltd. in Tokyo told Bloomberg.

Treasury yields pulled back further from 27-month highs hit in mid December following Friday's release of U.S. economic indicators that included strong housing and consumer confidence data but also numbers that pointed to slower household income. Of note: rising concern about Trump's policies, which threatens the euphoria-driven rally since the election, once trading resumes in earnest.

"The currency market is likely to lack incentives as major markets in Asia, Europe and North America will be closed. That said, dollar/yen risks drifting below 117 on caution toward the Trump administration's protectionist policies," said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo. Last week, Donald Trump named economist Peter Navarro, known as a China hawk, to head a newly formed White House National Trade Council. China's response was one of "shock" and as the FT reported “Chinese officials had hoped that, as a businessman, Trump would be open to negotiating deals,” said Zhu Ning, a finance professor at Tsinghua University in Beijing. “But they have been surprised by his decision to appoint such a hawk to a key post.”

Back to the USDJPY, according to the latest CFTC data, speculators boosted net yen short positions to highest this year in week ended Dec. 20. The pair logged its first weekly loss since Nov. 4 on Friday, falling 0.5%. 

BOJ minutes of Oct. 31-Nov. 1 policy meeting showed most board members saw necessity of keeping the 80t yen bond-purchase target. According to Reuters, BOJ policymakers disagreed on how much emphasis the central bank should place on the size of its bond purchases under a new framework targeting interest rates, minutes of its Nov. 1 rate review showed, highlighting the challenges of navigating the complex policy scheme. The BOJ shifted its target from the pace of money printing to interest rates under the new framework adopted in September. It guides short-term interest rates at minus 0.1 percent and the 10-year government bond yield around zero percent. But the central bank also maintained loose guidance that it will continue buying government bonds so that the balance of its holdings increases at an annual pace of 80 trillion yen ($682 billion), likely intended to appease board members who argued that heavy money printing helps heighten inflation expectations. At the two-day policy meeting that ended on Nov. 1, one board member said the guidance on the bond buying amount could gradually be phased down "over the course of time" as the BOJ would likely achieve its yield targets with fewer purchases, the minutes showed on Monday. But a few board members insisted that the central bank maintain the guidance because deleting it could send "a wrong signal to markets by making it appear as if the BOJ was considering tapering its asset purchases", the minutes showed. That concern is reflected in the USDJPY which is testing the 116 handle this morning.

Also speaking overnight at a meeting of the business federation Nippon Keidanren in Tokyo, Bank of Japan Governor Haruhiko Kuroda said that it’s necessary to achieve 2% inflation in this round of monetary easing to ensure Japan never falls back into deflation.  Kuroda said he rejects the argument that Japan should have a lower inflation target given its lower potential growth rate, adding that the low growth rate should be reason for aiming at higher inflation rate, in order to secure room for monetary easing. He also said that the lower the potential growth rate, the greater the risk of falling into deflation, and added that the commitment to overshooting inflation target designed to clarify BOJ’s stance that it will “certainly achieve this target.”

As an amusing aside, Kuroda said that while 2016 was a tough year, headwinds are now turning into tailwind and he is “convinced” Japan’s economy will take “big step forward to overcoming deflation” in 2017, because the "global economy has moved out of the post-financial crisis adjustment phase" and the pace of growth in advanced economies has accelerated recently. Translation: yet another career economist letting price action dictate the narrative; we wonder what he will say in a few months when the Trumpflation rally is long forgotten and the USDJPY has plunged to pre-election levels.

In any case, looking at the immediate future of the USDJPY, the technical downside is 116.70, while upside seems capped around 117.70, writes Naoto Ono, analyst in Tokyo at Ueda Harlow.

“Many market players are on holiday, so moves are a bit exaggerated with the obvious low liquidity,” says Simon Pianfetti, trader at SMBC Trust Bank in Tokyo.

Other key FX news via BBG:

  • The South Korean won gained 0.1 percent, snapping an eight-day losing streak.
  • The offshore yuan rose 0.1 percent to 6.9527 versus the dollar after a 0.2 percent gain last week.
  • India’s rupee was little changed at 67.8262 per dollar.
  • Brazil’s real appreciated 0.1 percent.
  • The ruble strengthened 0.8 percent, prices compiled by Bloomberg show.

Among open global stock markets, the action was focused in Asia and EM nations. Here are the highlights:

  • The Topix index dropped 0.4% in Tokyo. The index briefly erased its loss for the year last week, and is now down 0.6 percent for 2016. The Nikkei 225 has gained 1.9 percent this year.
  • The Shanghai Composite Index rose 0.4%. Earlier in the day, it fell to the lowest since October as reports of further curbs on the property market weighed on the sector. President Xi Jinping told a Communist Party meeting last week he isn’t wedded to China’s 6.5 percent economic growth objective, according to a person familiar with the situation.
  • Russia’s Micex Index rose as much as 0.5 percent after three straight days of declines.
  • India’s Sensex Index fell as much as 1.1 percent after Prime Minister Narendra Modi hinted at tax increases on stock-market income.
  • Global stocks were little changed last week after reaching an almost 17-month high Dec. 13.
  • Saudi Arabian stocks retreated, with the Tadawul index losing 0.3 percent, ending a three-day winning streak.