Risk markets have been gently correcting for the last 24 hours with the benchmark US equity market the S&P 500 down 1.2% cumulative over that period. Meanwhile the Shanghai Composite, the main Chinese index dropped 8% from its intra-day peak ending the day 5.4% lower – its biggest one day loss in five years. On the face of it, it seems like there might be something in the air, I’m not convinced but for the record, here are some other noteworthy things going on this morning…


  • Crude oil prices closed at another new year to date low yesterday, with the price of Brent for January delivery ending at $65.34. WTI closed near $62


  • Tesco PLC shares have dropped as much as 15% this morning on the back of a profit warning


  • Greek bond yields are back under pressure after the government called snap presidential elections, why should an election cause this you ask? Syriza the far left party could win. They could put at risk all the hard won reforms the current government has engineered. Remember Greece is by no means out of the woods yet.


  • The Russian rouble is again under pressure…not exactly a shock given what I just told you about oil prices. But spare a thought for bond yields there. They are over 200bps higher than they were 2 months ago, with borrowing costs closing in on 12.5% in comparison to about 10% in October.


I could tell you more.. but you get the point. There are lions and tigers roaming around the macro-scope today, I like a bit of fear mixed in with greed once in a while! Needless to say, US treasuries rallied with 10 year yields closing yesterday 5bps lower. I’m uncertain what the genesis of this mini-tantrum is, but as long as the S&P is down barely 1% I’ll stick to calling it a mini- tantrum. As you’ll note, most of the examples I mentioned above could be termed idiosyncratic, and I am reluctant to try to conjure up a narrative that links everything together. Perhaps it’s just one of those days. Yes certainly, bourses in the Middle East are under serious pressure now, but we all knew that would happen, those stock exchanges are loaded with oil related stocks, and construction companies that will have reduced order books given impending heavy declines in projected oil revenues, no one should really be surprised. But.. but… it’s just possible that oil prices are reaching levels that start to hurt derivative sectors. But here’s the thing, for every sector you name that is adversely impacted I’ll tell you another one that’s likely to benefit. I wouldn’t be shocked if we are making new highs on the S&P by the end of the week…


On the data front, we’ve seen some very disappointing import numbers published for Germany this morning, a 3.1% drop versus a 1.5% decline forecast. Compare that to the 5.2% rise of the previous month. Not good! Germany’s Eurozone partners have been counting on resilient demand in German to assist with their recovery plans…. Oooops! Across the channel, industrial production numbers in the UK have improved, albeit less than forecast, but.. better none the less. Please note, we continue to prefer pound sterling to the euro, and data like this doesn’t change our minds!


We don’t get much new data from the US later on today. The JOLTs Job Openings report might add a bit more colour to the whole “health of employment debate” in the United States, but non-farm payrolls was the big one last Friday. Every little bit of new information is good I guess. What is clear is that even as risk markets have pulled back the dollar’s rise has been halted for now. We are still in the equities up, dollar up paradigm clearly.


As I have mentioned in recent blogs I am concerned that USD/JPY has reached a very mature phase in its current bull trend, and this has been borne out by the facts. USD/JPY got to a high of 121.85 on Sunday, but is now trading at 119.90ish. The Japanese yen has clearly outperformed other major currencies in this mini dollar correction. It will be interesting to see what happens when the dollar regains strength. I continue to expect the Japanese yen to hold relatively better that the likes of the euro and the Australian dollar. Only temporarily though… where the Japanese yen eventually goes, might be extreme. I don’t predict good things for that currency… not at all!


Finally… while we remain bullish the US dollar against all and sundry in the longer term, we are getting close to levels against the majors – obviously I’ve already raised concerns about the Japanese yen – where more significant corrections may be warranted. This means that we might see a period of weeks, perhaps even a few months where pairs like EUR/USD, GBP/USD rally, but only before the weakness continues. For now I will need to study the charts a bit more before I can raise my level of conviction, and it would probably make sense for this to happen nearer the start of 2015. I am being cautious because we could get a capitulation fall in EUR/USD before such a scenario comes to pass, but I do feel it’s my duty to point out that the possibility exists. This concern of a dollar correction would be lessened if we see EUR/USD spending some time at levels closer to 1.21 for a reasonable (few days) period of time, I will of course update you if my conviction levels firm up. I don’t necessarily see dollar weakness against developing currencies however. They dance to a different tune and recent events may have reached points of stress that will be more difficult to recover from. More on this in later blogs, but think of all those dollars corporations in emerging markets have borrowed over the last few years, think how much stronger the dollar is now… ooops