Dollar Mixed In Thinning Activity, Dow 20,000 Watch Continues

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Summary

Riksbank extends QE a bit, but leaves rates unchanged and sends the SEK higher.

Sterling remains heavy, at 50% retracement of flash crash recovery.

Euro is trading within yesterday's ranges.

The US dollar is narrowly mixed as the holiday markets make for light turnover. Global equity markets are not finding much encouragement from the new record highs by the Dow Jones Industrial (NYSEARCA:DIA).

There have been a few developments to note. First, the Swedish krona is the strongest of the major currencies, rallying 0.7% against the dollar and reaching a two-month high against the euro following the Riksbank meeting. The central bank extended its bond buying program through H1 17, but at a slower pace.

It was a controversial decision and could be the final efforts. Two of the six-member board wanted to stop the bond purchases now. Another was interested in extending the purchases, but at half the pace that was ultimately decided. Currently, Riksbank is buying SEK45 billion of bonds (for H2 16). In the first half of next year, it will buy SEK15 billion of conventional bonds and SEK15 billion of inflation-linked bonds. The bank kept the deposit rate at minus 50 bp.

Second, the European Court of Justice ruled that Spanish banks that overcharged for mortgages must offer compensation. This was a blow to Spanish banks, which fell in response to the final ruling. The preliminary ruling allowed a time limit to claims for reimbursement, but the final court ruling disallowed the constraint. All Spanish banks are not equally affected, and some banks have put aside some of the funds. Still, financials are the worst-performing sector in Spain today. They are off nearly 1.75% in late morning turnover, while the Spanish market as a whole is off about 0.75%.

Meanwhile, Italian banks are under modest pressure. The index of Italian banks is off 0.6% and is the sixth declining session of the past nine. After the cabinet approved increasing the country's debt by 20 billion euros to help the banks, both chambers of parliament will vote on measures today. For reasons that seem to stem more from politics and economics, Italy has been slow to address its banking system's woes, and when it does move, it tends to be too little. There is no shock and awe or even a pretense of getting ahead of the curve of expectations.

Japanese shares finished marginally lower. They have advanced for six consecutive weeks and are up fractionally this week. However, as they rallied, short interest has grown. As of last week, at the Tokyo and Nagoya markets, short interest rose to JPY990 billion, a seven-year high.

The dollar is trading within yesterday's ranges against the yen, showing little enthusiasm to push back to last week's highs near JPY118.65. Initial support is seen near JPY117.00 and then Monday's low near JPY116.50. In Europe, the dollar is little changed against the euro, while sterling continues to sport a heavy tone.

There is an interesting decision expected shortly from the European Court of Justice with implications for Brexit. The Court will decide if a decision on a free trade agreement with Singapore requires individual country approval or it is sufficient that the EU institutions approve. If individual country approval is needed, it would suggest that the UK will need to have all individual EU members to ratify a new trade deal with the UK. This could prove to be a laborious and time-consuming process.

Sterling continues to struggle to sustain even modest upticks. Consider that in the last 12 sessions, including today, sterling has risen twice. Near $1.2310, it has retraced 50% of the gains scored since the flash crash. The 61.8% retracement is close to $1.22. On the upside, $1.2420 needs to be overcome to begin repairing the technical damage.

For its part, the euro is straddling the $1.04 level. It has not closed above its five-day moving average since December 7, and is found a little above $1.0410 today.

The US reports November existing home sales. It is expected to be slightly softer after a 2% gain in October. This year, existing home sales averaged 5.42 million (SAAR) compared with a 5.23 million monthly average last year and 4.92 million in 2014. The US DOE also provides new oil inventory figures. The API estimate showed a large 4.15 million barrel draw that supported prices. The Bloomberg survey median guesstimate is for a 2.4 million barrel drawn, which would be the fifth consecutive liquidation of stocks. That said, supplies in Cushing have risen for the last three weeks and may be more important for the knee-jerk market reaction.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.