Overview: Russia's formal recognition of the
two separatist regions in eastern Ukraine kicked out the legs upon which hope
of diplomatic solution stood. Putin's decision to send in troops into the
regions is seen the start of the war. The US, UK, and EU are preparing
sanctions. As one might expect, global equities fell, and bond yields
have edged lower. The large equity markets in the Asia Pacific region
were off more than 1%. Europe's Stoxx 600 gapped lower and subsequently filled
the gap, and is trying to snap a three-day slide. S&P futures have recouped most of their earlier declines, while NASDAQ futures are off about 0.4%. The US
10-year yield is off slightly near 1.93% after earlier slipping below 1.90%. Most
European benchmark narrowly mixed. The foreign exchange market
reaction is somewhat counter-intuitive. The Scandis and Antipodeans lead
the major currencies higher. The yen, Swiss franc, and sterling are nursing modest losses. Among emerging market, central European currencies are
posting small gains, while most of the freely accessible currencies are
weaker. The JP Morgan Emerging Market Currency Index is recovering from inital losses after posting small declines over the past two sessions. Gold had rallied to new highs, a bit above
$1914 but sold-off to almost $1895 in early European turnover where new bids
emerged. Crude oil jumped on the news and the April WTI contract neared
$95. It is now near $94 after finishing last week a little above $90. Natural gas prices have
risen as well. The US contract is up about 4.0%, while Europe's benchmark
has risen by around 7.5%. Iron ore fell by 2% after advancing 5% yesterday,
and copper is heavy for a third session.
Asia Pacific
Beijing's new regulatory
checks on links to Ant is taking a toll on tech shares in China and Hong
Kong. Its
efforts in coal and steel are seen boosting lending as well. The surge in
lending appears to have taken some of the urgency seen for more rate
cuts. Four large banks in Guangzhou, home of Evergrande, announced cuts
in mortgage rates yesterday. Still, the soft CPI and next week's February PMI,
where more weakness is expected may fan expectations. Moreover, while the
US and Europe lift Covid-related restrictions, Hong Kong and China appear to be
moving in the opposite direction. While China is in favor of checks
on NATO, the recognition of separatist forces tends not to find much favor in
Beijing, which is wary of such ploys being used against it.
New record fatality tolls in
Japan, and the delayed booster rollout undermining support for Japan's cabinet. The latest poll showed an 8.3
percentage point slide to 43.4%. Approval of the Kishida government's
handling of the pandemic fell 6.3 percentage points to 38.9%, just above the disapproval
rating of 37.9%. Recall that last week, the government lowered its
overall economic assessment for the first time in five months. The
extended social restrictions are due to end March 1. An upper house election
will be held in July, and it could determine the political future of Kishida.
The US dollar found support
in early Asia near JPY114.50, its lowest level in almost three weeks. It recovered to about JPY114.90.
Still, if it cannot trade above about JPY115.15, it will be the fifth session
of lower highs. There are $1.8 bln in options at JPY115.20-JPY115.25
today. Falling equities, lower yields, and the uncertainty over Russia's
intentions could see JPY114.20 on a break of JPY114.50 today. The
Australian dollar is firm above $0.7200 but below the highs from the past two
sessions around $0.7225. The intraday momentum indicators warn
that the upside may be limited now. Note that despite several efforts, it has
been unable to settle above $0.7200 this month. There is a A$1.7 bln
option that expires there today. The US dollar rose to almost
CNY6.3450, its highest level in a week, before reversing lower and falling back
toward CNY6.3330. As seen in four sessions last week, the PBOC set
the dollar's reference rate slightly weaker than expected
(Bloomberg survey) at CNY6.3487 vs CNY6.3489.
Europe
Russia formally recognized
the two separatist regions in east Ukraine that it had fostered if not made of
whole cloth. Putin
proceeded to send it Russian forces into the regions. It is not yet clear
whether he intends on taking the troops to the border with Ukraine
forces. Note that large parts of those regions, Donetsk and Luhansk are
still controlled by Kyiv. The tactics seems broadly similar to Russia's
2008 operations in Georgia and the recognition of Abkhazia and South
Ossetia. The US, EU, and UK are preparing sanctions.
Germany's February IFO
survey was better than expected. The current assessment improved to 98.6 from 96.2. It
is the first increase in six months. The expectations component rose to
99.2 from 95.8. It is the second consecutive improvement and is at its best
level since last July. The net effect was to lift the overall business
climate reading to 9.89 from 96.0. It reached 10-month low in December a
little below 95.0. This seems consistent with the recovery in the
preliminary composite PMI reported yesterday of 56.2, indicating Europe's
largest economy is recovering from the soft patch in Q4. In December, the
composite PMI had slipped slightly below the 50 boom/bust level.
The euro initially
approached last week's low (~$1.1280) but rebounded smartly and is make new
session highs in late morning turnover in Europe near $1.1345. There are options for 780 mln
euro at $1.1330 and another 455 mln euros at $1.1350 that expire today.
The intraday momentum indicators are getting stretched. Sterling
managed to close above $1.36 yesterday, for only the second time since January
19, but was sold in late Asia to almost $1.3550. It rebounded in
early European turnover to almost $1.3600. A consolidative North American
session maybe the most likely scenario. The euro is snapping a four-day
slide against sterling that took it to almost GBP0.8300. A close above GBP0.8355-GBP0.8360
would be a constructive technical development.
America
The geopolitical
developments are front and center today in terms of talking points, even if the
foreign exchange market reaction is surprising. The economic calendar is jammed with house
prices, the preliminary February PMI and the Conference Board's consumer
confidence survey. The Richmond's Fed manufacturing survey is also
due. The market may be most sensitive to the PMI but even that is
unlikely to have much impact today. Expectations for Q1 GDP appear to be solidifying
around 1.3%-1.6% annualized pace. A small upward revision is expected in
Q4 21 GDP later this week. The Fed's Bowman spoke yesterday and held out
the possibility of a 50 bp hike next month if inflation comes in "too
high" (whatever that means with CPI at 7.5% and the PCE deflator likely to
rise to 6%--to be reported at the end of the week). The odds of a 50 bp
move rose to almost 32% from about 25% before the weekend.
Canada's Prime Minister
Trudeau will retain emergency powers for a few more days even after the
protests have been cleared from downtown Ottawa and border crossings were
re-opened. The
economic impact not seen a something that will derail the Bank of Canada from
beginning its tightening cycle next week. The central bank meets on March
2. The swaps market has a little more than a 55% chance of a 50 bp hike
discounted. At the end of last month, slightly more than a 20% chance was
seen.
The US dollar reached a
five-day high near CAD1.2770 in reaction to the Russian news but was sold in
the European morning to almost CAD1.2725. Yesterday's low was about CAD1.2720. It
probably takes a break of CAD1.27, where a $1.23 bln option expires later
today, to signal anything of interest. The lower end of this month's
range is in the CAD1.2650-CAD1.2660 area. Mexico and Brazil have
light economic calendars today. The greenback rose above its 200-day
moving average against the peso (~MXN20.3475) for the first time in four
sessions. It has come back offered to straddle the MXN20.30 area in late
morning European dealings. Yesterday's low was slightly below MXN20.25
and last week's low was by MXN20.2360. We suspect support in the
MXN20.26-MXN20.28 may limit the downside today. Many asset managers continue
to extend Brazilian exposure. The dollar fell to almost BRL5.0750 yesterday,
its lowest level since last July. Yesterday's high near BRL5.1550 may
offer a nearby cap.
Disclaimer
Reviewed by Marc Chandler
on
February 22, 2022
Rating:
