Eerie and Nervous Calm in Capital Markets

[Ben Graham]

There are many moving pieces and Japan’s finance minister call for market calm seemed to help. Japan’s 30- and 40-year yields fell around 15 bp today after yesterday’s surge. There is a fragile calm in the capital markets today, and the dollar is mostly consolidating against the G10 currencies. Meanwhile, President Trump will speak at Davos shortly. Also today, the Supreme Court hears the appeal of the president’s attempt to dismiss Federal Reserve Governor Cook. 

In an episode that seems to capture the spirit of the American exceptionalism embraced by the Trump administration: Treasury Secretary Bessent, who alongside the Commerce Secretary and Trade Representative sat in the front row of the court when it heard the case involving the president’s use of emergency powers to implement the widespread tariffs, chastised Federal Reserve Chair Powell for attending today’s arguments.  Meanwhile, the Supreme Court may also give it verdict about those emergency powers. 

Prices  

G10

• The euro peaked yesterday slightly below $1.1770 in early North American turnover and lost its upside momentum. It slipped back to around $1.1710 and has drifted toward $1.1700 after holding below $1.1735 so far today. Options for 1 billion euros expire today at $1.1690. A break can see $1.1650. 

• Japanese bond market stabilized after yesterday’s rout and the dollar has been confined to about a 20-tick range around JPY158 where $1.25 bln in options expire today. If Japanese officials help contain the bond sell-off, the concern is that it will weigh on the yen. Yet, the softer bond yields have not weighed on the yen. 

• Sterling stalled yesterday in front of $1.3500 and by the end of the North American session had given back the lion’s share of its gains. It was sold to almost $1.3400 today. The intraday momentum indicators are stretched, and the $1.3390 area corresponds to a retracement objective of the recent run-up. Below it, initial support may be around $1.3370.

• The US dollar was sold to about CAD1.3815 yesterday. It is consolidating in a tight range through the European morning of ~CAD1.3825-CAD1.3845. The 20-day moving average is slightly below CAD1.3810. The CAD1.3860 area may offer resistance.

• The Australian dollar extended yesterday’s gains and reached almost $0.6760 today, its highest level in two weeks, when it poked above $0.6765. That was its best level since October 2024. The high for the day may not be in place, but the A$500 mln in options struck at $0.6800 may be a bit much. 

EM 

• The Mexican peso remains in demand. The dollar resumed its fall today after consolidating yesterday. The greenback reached MXN17.5320, its lowest level since June 2024. Our next target is around MXN17.38. 

• The PBOC set the dollar’s reference rate at CNY7.0014 today after CNY7.0006 today. Official signals are being closely scrutinized as the CNY7.00 fix level that has been anticipated for some time has been approached. The dollar is consolidating against the offshore yuan in about a CNH6.9535-CNH6.9640 range. Yesterday’s low was slightly below CNH6.95. 

• International investor sales of Indian stocks kept the rupee under pressure. The dollar rose to a new record high (~INR91.7450). There are some reports of intervention but if so, the operation seems to suggest trying to smooth it out rather than reverse the losses. 

Other Markets 

• Equities are struggling after yesterday’s sharp sell-off. Still, the large markets in the Asia Pacific region were mixed. Tokyo and Taipei fell but Hong Kong, China, and South Korea advanced. Europe’s Stoxx 600 is off for the fourth consecutive session. It is down almost 0.5%. US index futures are steady to firmer. 

• While verbal intervention helped JGB yields push lower after yesterday’s rout, European benchmark yields are mostly slightly firmer. The 10-year US Treasury yield is off a basis point to 4.28%. 

• Gold has raced to a new record (~$4888.4) but has pulled back to trade around $4865 in late European morning turnover. Silver is trading quietly and held below yesterday’s record (~$95.88). 

• March WTI is little changed near $60.35. It is consolidating in the upper end of yesterday’s range and below the 200-day moving average (~$60.50)

Data

• The US reports September and October construction spending and December pending new home sales. However, the focus is on the Supreme Court. It is “decision day” and investors are anxious for the ruling on the president’s use of emergency powers to impose widespread tariffs and apparently will use that authority to slap an extra levy on several countries for objecting to his desire to acquire Greenland. Also, the Supreme Court hears the appeal on the president’s attempt to fire Federal Reserve Governor Cook. Fed Chair Powell will reportedly attend the arguments.

• Mexico reports November retail sales. A modest 0.2% increase is expected after a 0.4% gain in October. Mexico’s retail sales rose by an average of 0.2% in Q3 after an average increase of 0.1% in Q2. In GDP terms, consumption contracted in the first half and grew 1.0% year-over-year in Q3 and may have been a little stronger in Q4. 

• The UK’s CPI rose by 0.4% in December. It fell by 0.2% in November. The year-over-year rate edged up to 3.4% from 3.2%. The core rate was steady at 3.2%. It is the first increase in the headline rate since last July. Service prices rose 4.5% (4.4% in November). It is also the first increase since last July. Producer output prices rose 3.4% year-over-year, the same as in November. Input price increases slowed to 0.8% from 1.1%. The Bank of England meets on February 5 and is seen standing pat before easing in Q2. 

Disclaimer