MKS PAMP Group - Daily Asia Wrap

Range Asian Hours (from Globex open)

 
MACRO: U.S. equity indices closed in the red on session lows Monday as concerns over lacklustre Cyber Monday online shopping sales weighed on the retail sector and investors start to focus on several key events at the back end of the week - namely ECB and NFP's. The Dow Jones succumbed -78.57 points, or -0.44%, to 17,719.92, the S&P500 declined -9.70 points, or -0.46%, to 2,080.41 and the Nasdaq eased -18.858 points, or -0.37%, to 5,108.666. Losses in healthcare (-1.3%), staples (-1%), discretionary (-0.8%) and industrials (-0.7%) led the march lower, while energy (+0.4%) and telecoms (+0.4%) provided some positive relief. In contrast European stocks advanced ahead of Thursday’s widely anticipated policy announcement from the ECB governing council - with investors widely speculating some form of easing from the Central Bank. As a consequence the euro remained under pressure which helped exporters and luxury goods makers to prosper. The FTSE Euro First 300 advanced +5.67 points, or +0.37% to 1,517.98, the DAX piled on +0.78% to 11,382.23 after positive preliminary CPI data, the CAC40 added +0.56% to 4,957.60 and the FTSE100 declined -0.3% to 6,356.09, weighed down by the banking sector ahead of today's BoE stress test results. In FX, market digested month end flows and investors remained wary ahead of an eventful week - RBA today, ECB Thursday, NFP Friday. EURUSD fell to a 7 month low of 1.0558, trading heavy in spite of expectations that month end re-balancing might buoy the currency up towards 1.06. Goldman Sachs see a -17bp depo cut priced into the markets and the bar being set quite high for Draghi to deliver on Thursday. They favour a small short bias since Draghi has yet to disappoint and will want to deliver for his “last” opportunity to ease this year. The AUD and NZD outperformed, gaining ahead of RBA rate announcement today and tomorrow’s Fonterra auction. China was the main focus in Emerging market FX, as the IMF announced overnight that RMB will be included in the SDR basket with a weighting of 10.92%, though the physical implementation will be happening over next 9-10months. Reaction for the USDCNH was muted on this news however with the market widely expecting this outcome. Activity in treasuries was light and was dominated by month-end flows, the curve flattening slightly ahead of this weeks major data. The 2y note yield rose +1.2bps to 0.93% and the 10y bond yield retreated -0.9bps to 2.211%.

On the data front overnight U.S. pending home sales crept higher during October rising +0.2% (+1.0% expected) to a seasonally adjusted reading of 107.7 from an upwardly revised -1.6% during September (-2.3% prior). The National Association of Realtor's (NAR) said the pace of sales plateaued in recent months because buyers are finding a limited number of available homes and prices are rising quickly in some markets. “In the most competitive metro areas - particularly those in the South and West - affordability concerns remain heightened as low inventory continues to drive up prices”, according to NAR chief economist Lawrence Yun. Elsewhere, Chicago-area business activity contracted during November with the Chicago Business Barometer slumping to 48.7 (54.0 expected) from 56.2 in October. The sharp fall is indicative of the see-saw pattern of demand seen so far this year with output and orders shifting in and out of contraction. MNI Indicators Chief Economist Philip Uglow said, "The slowdown in the global economy, the strong dollar and decline in oil prices have all impacted businesses this year to varying degrees. While it looks likely that the Fed will begin to raise rates in December, the latest setback supports the case for a gradualist approach to monetary tightening”. New orders plunged to 44.1, the lowest level since March, from 59.4 in October, the production index also tumbled but did manage to hold above 50. Still in the U.S. the Federal Reserve Bank of Dallas said its general business activity index remained in contraction but less so, rising nearly 8 points to -4.9 (-10 expected). The production index, a key measure of state manufacturing conditions, edged up from 4.8 to 5.2, new orders stabilised somewhat, rising 6 points to -1.6. Labour market indicators improved with the employment index posting a double-digit increase to 11.6, its highest reading since August 2014. In Europe, UK mortgage approvals for October were solid at 69.6k (69.9k expected) vs 69k in September and the level of mortgage lending was unchanged at GBP3.6bn. The data suggests the housing market is holding up despite tax and macro-prudential changes, which is good news for the recovery, where growth looks set to rise by about +2.5% next year. German EU harmonised inflation printed right on expectations, up +0.1% MoM and +0.3% YoY in November. That follows earlier disappointing Italian data – offsetting yesterday’s Spanish lift - and keeps pressure on the ECB for additional monetary easing this week.

The IMF Executive Board completed its review of the Special Drawing Right (SDR) Currency Basket. As expected the Board decided that, effective October 1, 2016, the Chinese renminbi will be included in the SDR basket as a fifth currency. The IMF also adopted a new formula for determining currency weights in the SDR basket. The following weights based on the new formula will be used to determine the amounts of each of the five currencies in the new basket: U.S. dollar 41.73% (v. 41.9% at the 2010 Review), Euro 30.93% (v. 37.4%), Chinese renminbi 10.92%, Japanese yen 8.33% (v. 9.4%) and Pound sterling 8.09% (v. 11.3%).   

PRECIOUS: Gold had a decent rebound overnight, managing to bounce some $17 off the Friday lows ($1053.15) during NY trade to a peak of $1069.95. In Asia yesterday it was much of the same we saw late last week, with gold being sold initially from the Chinese and weighing on the spot market. The yellow metal touched a low of $1053.70 immediately after the SGE open, but managed to rebound as the CNH began to rally amidst supposed PBoC intervention. From there though the metal remained fairly sluggish into the Asian afternoon consolidating quietly between $1054.50-1056.50. European based trade did little to force any moves in the gold happily remaining in a tight $1055-1058 range, on pretty light flows. Once NY came in we started to firm on what appeared to be short covering, ahead of the plethora of important data later in the week. It was a measured climb throughout the session hitting the $1069.95 high with 3 hours of electronic trade to go, eventually peeling back to $1064.50 during the twilight hours, as some fast money profit taking went through. The Comex commitment of traders report (COTR) was belatedly released overnight and showed that non-commercial gold longs had shrunk to 1.3 million oz and shorts were sitting at 18.7 million oz, which is just off the record August level of 20.2 million oz, and may have spooked some shorts, prompting the rally. I think a number of market participants have been disappointed by the lack of a corrective bounce for the precious - us included - but think last nights rally (particularly for gold) may prove more meaningful in terms of follow through than what we have seen for the past month. The likelihood of Fed easing later this month of course will still weigh on the metal and contain rallies, but with the ECB and NFP's later this week combined with the extended short positioning it is very likely we could see further short covering, at least for the next few sessions. For the other metals silver was mostly unchanged yesterday while the PGM's ended the session marginally lower.            
   
ASIA TODAY: There were some fairly explosive moves seen across the metals today, as further short covering drove the precious higher across the board. Gold began the session fairly quietly maintaining the NY closing level of $1064.50 as modest two way flows were seen for the first few hours. Tocom opened created no stir for gold, though some decent platinum saw it jump $4-5 to $835. Once the SGE commenced trading the initial move for spot gold was lower dropping $2 to the intra-day lows. That was it for the selling though as decent spec short covering was seen on the dip, which curbed further Chinese liquidation. It was around this time that news began to hit the wires that the huge Japanese public pension fund GPIF, were planning on hedging some of their investments against FX moves - notably against the EUR. This was in the wake of the fund reporting a loss in excess of JPY 7.9 trillion for Q3 2015. The following headlines did the rounds:
*DJN - DJ JAPAN GOVERNMENT PENSION INVESTMENT FUND BEGINS CURRENCY HEDGING -- SOURCES
*DJ JAPAN GPIF JOINS OTHER LARGE PENSION, SOVEREIGN FUNDS IN HEDGING CURRENCY RISK -- SOURCES
*DJ JAPAN GPIF USES BENCHMARK TO 'QUIETLY HEDGE' -- SOURCE
*DJ JAPAN GPIF HEDGING AGAINST EURO IN 'SHORT TERM' -- SOURCES
*GPIF SAID TO HEDGE SOME INVESTMENTS AGAINST FX MOVEMENTS: WSJ
*ADARSH SINHA : *GPIF SAID TO HEDGE SOME INVESTMENTS AGAINST FX MOVEMENTS: WSJ
This prompted a drop in the USD, particularly vs. the JPY, but gains in the EUR, AUD and GBP were also seen. It also gave the precious a bit of a leg up, the gold rallying sharply through $1070 on decent volume, silver through $14.20 and platinum tacking on another $5 to trade as high as $841 bid. Can read the WSJ article about it here: http://www.wsj.com/articles/japan-pension-fund-hedges-against-currency-moves-1448937430 . Gold remained fairly well bid throughout the morning  remaining above $1070 into the SGE lunch break.

Throughout the region, Chinese manufacturing PMI was released today, hitting a 3 year low at 49.6 in November (49.8 expected), compared with 49.8 in the prior month and reflecting a painful de-leveraging process in manufacturing sector. By category, the softness was across the board, the output index declining -0.3 to 51.9, new orders and new export orders falling -0.5 and -1.0 to 49.8 and 46.4 respectively. Input prices also dropped sharply by -3.3 to 41.1, as commodity prices plunged in November. In addition, the private Caixin PMI came in at 48.6 in November, up from 48.3 in the prior month. While there has been continued improvement in this private Caixin measure in the past two months, it is still well below the trend level. All in all, China’s manufacturing sector remains sluggish due to a marked property slowdown which does not look like turning a corner anytime soon. While property prices are turning around led by first-tier cities, housing investment continues to moderate, reflecting a significant property inventory overhang in the economy according to CommerzBank analysts. Elsewhere, the RBA rate decision was a bit of a non-event. There were very few changes to the statement - one of the surprising points being that the FX language was unchanged: "The Australian dollar is adjusting to the significant declines in key commodity prices". This is despite the AUD having been relatively resilient to the drop in iron ore prices to fresh <0.6900 lows. So it appears the RBA is for now comfortable with the level of the exchange rate. There was also no sign of a concession to the extremely weak Capex data released last week and it appears they remain relatively upbeat on the business sector. So acting on Governor Steven's words we can "chill out" until February when they next meet.  

Over the afternoon gold held above $1070 which is positive and it will be interesting to see what London and the U.S. do with it tonight. Turnover was sizeable, with some 27.5k lots going through Comex (GCG6) in the first 6 and a half hours. Platinum and silver have also remained buoyant into the afternoon session. Ahead today on the data calendar look out for a host of Eurozone, U.S. and Canadian manufacturing PMI's, German and Eurozone unemployment data, U.S. ISM manufacturing data, Canadian GDP and finally U.S. construction spending. Have a good day ahead.