The Japanese market re-opened after an extended holiday closure and pushed the dollar down against the yen to test the pre-weekend low near the 20-day moving average (~JPY104.15), below which it has not traded since early November.
The Nikkei gapped lower and proceeded to shed 2.3%, led by consumer services and telecoms. It is the sharpest fall since October. The main driver appeared to be a 'catch-up' to the losses seen in other major markets while Tokyo was closed. An important downside gap from mid-December in the 15588-15798 area may be key to the technical outlook.
Separately, we note that Japanese small cap shares performed markedly better, gaining almost 0.7%. Consumer services advanced here, but the strongest sectors were technology, oil and gas, and utilities.
Ironically, the new equity savings scheme, NISA ( Nippon Individual Savings Account) begins today. Recall that it allows individuals to buy JPY1 mln (~$9600) of equities (or other risk assets--not government bonds) annually for the next five years exempt from capital gains tax.
The euro initially extended its pre-weekend decline, slipping to almost $1.3570 before recovering in the European morning, despite some disappointing service PMI readings. The $1.3650-75 area is key from a technical perspective of the near-term outlook for the euro.
The euro area services PMI slowed in line with the flash reading from 51.2 in November to 51.0 in December, which represented the third consecutive month a declines since the 52.2 reading in September. The bright spot was Spain, where the services PMI rose to 54.2 from 51.5 and Ireland, which jumped to 61.8 from 57.1. However, Germany disappointed with a 53.5 reading down from the 54.0 flash and 55.7 in November. France may have ticked up from a 47.4 flash reading to 47.8, but it still represents a decline from November. The move to expansion (above 50) in September and October seems premature and these readings are consistent with the French economy contracting again in Q4.
The UK CIPS service PMI was also disappointing. It slipped to 58.8 from 60.0. It is the first reading below 60 since June. Sterling, unlike the euro, has not been fully able to shake it off. Sterling's pre-weekend losses were extended in Asia initially, but the low of the session, just below $1.6340 was seen in early Europe. Initial resistance now is see in the $1.6400-20 area. We note that a Sunday Times article speculated that the BOE could lower its forward guidance unemployment threshold to 6.5% from 7.0%.
In a bit of a reversal of the recent action, core European bonds are firmer today, while Spanish and Italian bonds are weaker. However, Spanish and Italian equities are among the best performers today, rising 2/3 to 3/4 of 1%, while the Dow Jones Stoxx 600 is slightly lower on the day.
HSBC reported its measure of China's services PMI. It slipped to 50.9 from 52.5. Last week the official report was released showing a decline to 54.6 from 56.0. The Australian and New Zealand dollars are consolidating their sharp pre-weekend gains. The Aussie is holding above its 20-day moving average, which had capped counter-trend bounces twice in each of the past two months. The key axis, many have suggested, was the euro-Aussie cross. The cross sold off roughly 2.5% after the New Year's holiday. It is little changed on the day; consolidating last week's losses. The market appears to be awaiting fresh leadership.
The North American session features the US service ISM and Nov factory orders. Note that over the weekend, Fed's Plosser and Lacker spoke in hawkish terms. The key take away is that the bar to reverse or slow the tapering decision is high. Yellen is expected to be confirmed by the Senate later today. Also, as a reminder, December auto sales reported before the weekend were disappointing at 15.3 mln units, which is nearly a 1mln slower pace than seen in November. It immediately points to a weak headline retail sales report (January 14) and may impact industrial output going forward, as the slow down in sales was concentrated among domestic producers.