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Morning Brief
Market sentiment has turned lower in early Friday trade after short-term borrowing costs for China rose to levels not seen since 2015 during the Asian session. China’s interbank overnight repo rate rose to ten percent, ratcheting up concerns that easier borrowing conditions may not come until Chinese New Year.
The latest reports pertaining to the worrying situation suggest that the People’s Bank of China may increase funding injections ahead of the Lunar New Year holiday to ease financial markets concerns.
Given the sudden rise in short-term Chinese borrowing costs Asian indices and stocks came under pressure on the weekly price close, while the VIX CBOE volatility index remained at elevated levels.
Financial markets are also concerned about the South African strain of coronavirus today. Novavax have reported that phase three trials for the new South African COVID-19 variant have only been 60 percent effective.
With Chinese borrowing costs rising and fresh COVID-19 concerns, the US dollar index has been catching bid. The greenback is notably stronger against the euro, British pound, Australian dollar, New Zealand dollar, Canadian dollar, and the Swiss franc.
The Japanese yen currency is also under pressure against the buck, with the USDJPY probing against the 104.50 level. Japanese industrial production data this morning came in at -1.6 percent this morning. Tokyo area CPI inflation also came in soft at -0.5 percent versus expectations of -0.3 percent.
Commerzbank has come out with a note this morning stating that the ECB is now in a currency war. The bank said “The timing of the ECB’s communication campaign suggests that it does not want to slow down the speed of appreciation of the euro but wants to force certain exchange rate levels. We can only interpret this to mean that the ECB has de facto declared currency war.”
Deutsche Bank has also come out and stated that the new United States Treasury Secretary Janet Yellen also faces the risk of battling a currency war. Yellen is scheduled to head to the White House later today to brief the Biden administration.
Following yesterday’s major downside moves in GameStop and AMC markets are still concerned about Main Street taking on Wall Street. The trading forum Wallstreetbets is now reported to have over 4 million participants, leaving the prospect of more wild moves in US stocks a very real reality.
Day Ahead
German unemployment data is set to headline the economic docket during the European trading session. Any signs that the powerhouse of Europe is facing rising unemployment could dent the euro currency and European equities.
Without question the release of Core PCE, which is the US central banks preferred measure of inflation, so any big beat could be a market mover. Personal Spending data will also be closely watched later today, as the market participants look for signs of inflation.
Both releases have the potential to upset the apple cart on Wall Street, especially if the bond market starts to get a hint of rising inflation. The US dollar is likely to firm if inflation comes in hot.
Traders also look to US Sentiment and Pending Home Sales data today. Federal Reserve members Kaplan and Daly will also be giving scheduled speeches later today. All in all, it should be a busy close to the trading week.
