Dollar And Bonds Mixed, Equities Higher

The US dollar is mixed amid a light news stream. Last week's losses were extended against most of the major currencies except the Japanese yen. The greenback slipped from testing JPY100.45 before the weekend to JPY99.80. There is talk of a large amount of JPY100 strikes expiring in the first half of the week.

The favorable reaction to the more detailed report of the recent Chinese Third Plenary Session helped lift the Shanghai Composite 2.9% and extended the recovery seen since last Thursday's lows to 6%. The optimism of market-oriented reform helped lift the regional equity markets (MSCI Asia-Pacific Index rose about 1.1%, which includes a flat performance by the Nikkei) and many local currencies. There was some speculation that Korean and Malaysian officials may have intervened to slow their currencies' rise.

European equities are also advancing. The Dow Jones EuroStoxx 600 is up about 0.35% near midday in London led by utilities and financials. We note that following the split in the center-right party in Italy, a greater sense of political stability (ahead of the November 27 vote that will likely expel Berlusconi from the Senate and leave him vulnerable to more legal action), Italian markets are out-performing today. The FTSE Milan index is up 1.3%. Italy's 10-year yield is essentially flat, while other euro area bond markets are under a little pressure.

New Zealand reported its service activity index at a 6-year high, which reinforces ideas that the RBNZ is likely to hike rates in the first part of 2014. The New Zealand dollar is the strongest of the major currencies, gaining about 0.5% against the US dollar. The Australian dollar has gained 0.4% against the US dollar, which appears to be mostly in reaction to the Chinese news and the tug from New Zealand. Off most radar screens, but something that could become a more salient issue, is Australia's debt ceiling debate. It is reportedly approaching around December 12. Last week the Senate rejected an attempt to raise the ceiling to A$500 bln from A$300 bln. Opposition parties want A$400 bln. Treasurer Hockey has warned of the risk of a government closure.

There have been two reports to note from Europe today. The first is a softer than expected Rightmove house price index in the UK. It fell 2.4% in November, largely unwinding the 2.8% rise in Oct. However, the year-over-year pace edged higher to 4.0% from 3.8%. Sterling recorded its high, just shy of $1.6150 in early European turnover, but could not maintain the momentum and slipped back toward $1.6100, which is the low end of the congestion range from Friday afternoon US before the weekend.

The second is the euro area's November current account. It narrowed to 13.7 bln euros on a seasonally adjusted basis from 17.9 bln in August. The financial account (direct and portfolio capital flows) shows deficit of about 12 bln euros. Direct investment included equity capital and reinvested earnings of about 9 bln euros and about 2 bln of net inflows of other capital (largely intra-company loans). Net equity portfolio flows saw an outflow of about 20 bln euros, driven by residents purchases of foreign shares. There was a net inflow of about 5 bln euros in the debt portfolio flows, which were primarily reflecting non-resident purchases of euro area money market instruments.

The euro rose above the previous day's high for the fifth consecutive session, but without much momentum. Today's high just shy of $1.3520 is the highest since the ECB meeting on November 7. Intra-day technical readings warn that additional upside progress may be difficult to sustain. Support is seen in the $1.3470-80 area.

The US reports TIC data and Canada reports its equivalent (International Securities Transactions) today. Both are from September and are typically not market movers. Several Fed officials speak today. We continue to think there is merit in our view of paying closest attention to the "central committee" of the Federal Reserve; its own Troika--BYD--as in Bernanke, Yellen and Dudley. The key takeaway is that December tapering is highly unlikely.