Overview: Bold new sanctions on Russia and
more weapons for Ukraine were announced over the weekend. Russia
responded by raising the readiness of its nuclear forces. As a result, the
risk-on seen ahead of the weekend has been reversed. When then-US
President Trump ordered the assassination of Iran's Major-General Soleimani in
January 2020, it seemed to signal a year of geopolitics. Instead, it was
about Covid. At the end of last year, Omicron threatened to keep the
pandemic front and center. Instead, with Russia's invasion of Ukraine and
the large-scale response, geopolitics has eclipsed the pandemic. Asia
Pacific equities edged and traded higher except for Hong Kong and Singapore. Led by
the financial and energy sectors, the Stoxx 600 is off by about 1.6%. US
futures are around 1.3% lower. Bonds have caught a bid. The US 10-year
yield is off four basis points to 1.92% and the 2-year is off six basis points to 1.50%. European core benchmark yields are 1-2 bp lower, while the peripheral yields in Spain and Italy are edging higher. In the foreign exchange market, the dollar is firm, while the Swiss franc
and Japanese yen are the most resilient among the major currencies. The
Scandis are leading the losses, off 1.0%-1.6%. A small number of Asian currencies,
including the Chinese yuan are steady to firmer against the dollar, while most are heavier. The Russian rouble (~-18.5%) and central European currencies
(~-2%) are hit the hardest. The JP Morgan Emerging Market Currency
Index is off 2.2%, which would be the most since mid-March 2020. Gold and oil
rallied, as one would expect, but did not take out last week's highs.
Gold stalled near $1930 (last week's high ~$1975) and fell to $1893.5 in the European morning before stabilizing to straddle the $1900-level. April WTI rallied to almost $100 but has steadied around $96. US natgas prices are up around 2% to recoup the last pre-weekend loss. Europe's natgas benchmark has surged but is coming off its highs. It held below last week's highs and is up almost 15% on the day. Iron ore rallied about 4%.
Copper is about 0.8% higher. The price of May wheat is up about 5.5%
after falling 8% before the weekend.
Asia Pacific
China is taking a more
nuanced position vis a vis Russia than may meet the eye. Although it tends not to receive much
attention in the US press, Chinese banks typically follow OFAC (US Office of
Foreign Asset Control) rules and sanctions. They adhere to them for the
same reason many others do: fear of being excluded from the dollar
market. Four of the largest Chinese banks complied with US sanctions
against Iran, North Korea, and even top officials in Hong Kong. Reports
suggest Chinese refiners have stopped taking fresh seaborne oil from Russia.
Two large banks also have restricted funding for the purchases of Russian
commodities. Other international lenders are imposing restrictions on
trade finance linked to Russia. One report told of a state-owned Chinese
coal importer unable to get a credit line from banks in Singapore for shipments
to Russia. China may dislike NATO, which did not appear to play the
proclaimed defensive role in Afghanistan but fears its banks would be
sanctioned for transgressions.
Japan's economic data
confirmed what the market already knew. The virus and social restrictions have made for a weak
start to the New Year. Retail sales fell for the second consecutive month
in January. The 1.9% decline was more than expected and follows
December's 1.2% decline (initially reported as a 1.0% fall). Industrial
output contracted by almost twice what the market expected. The 1.3% loss
of output on the month follows a 1.0% decline in December.
The dollar initially fell to
JPY114.90 and recovered to trade a couple of pips above the pre-weekend high
(~JPY115.75). It
has settled into a narrow range of around JPY115.40, where a $1 bln option
expires today. On Russia's initial invasion,
the dollar spiked to nearly JPY114.40. The Australian dollar has
been confined to its pre-weekend range and is probing the $0.7200-area near
midday in Europe. The Reserve Bank of Australia's meeting ends first
thing tomorrow morning in Sydney. Last week's high, before the invasion,
was around $0.7285. That may be a bridge too far today, but the session
high may not be in place yet, and the pre-weekend high near $0.7235 could be
approached. The dollar has fallen to a new four-year low against
the Chinese yuan by CNY6.3065. Last week's low was a little above
CNY6.31. The reference rate was set at CNY6.3222, a bit above the median
market projection (Bloomberg survey) of CNY. 63200. The PBOC fix was also the
highest in four years. Exporters reportedly were dollar sellers, while a
few state-owned banks were on the bid. The yuan strengthened further on a
trade-weighted basis, aided by the rouble's drop. The rouble's weighting
in the basket is about 3.65%.
Europe
The combination of excluding
most Russian banks from the SWIFT messaging system, sanctioning most of
Russia's large banks, and targeting Russia's central bank (EU banned all
transactions) will deal a crippling blow to Russia's economy. Sanctions are also aimed at the oligarch's
offshore assets. Switzerland looks poised to freeze Russian assets.
Even before the latest round of sanctions, S&P cut Russia's rating
to BB+, below investment grade, and warned that further downgrades are possible
(negative outlook). Other decoupling measures were announced.
British Petroleum says it will sell its 20% stake in Rosneft. Although the
Chairman of the Board of Rosneft, former German Chancellor Schroeder, has not
resigned, the BP CEO resigned from the board. Norway's sovereign wealth
fund is considering divesting its Russian holdings, estimated to be worth
around $3.3 bln at the end of last year. Yes, the chokehold has some
loopholes, like Gazprom's banking arm not being sanctioned. However, it is to
facilitate gas shipments and payments still necessary for Europe. The
US and Europe are still reluctant to target Russia's energy sector.
Russia's economic response
was quick. The
rouble slumped 8% at the open on the Moscow exchange and fell from the daily
limit. The central bank is believed to have intervened. It hiked its
key target rate to 20% from 9.5% and instituted capital controls.
Businesses are forced to sell their foreign exchange holdings, and non-residents
were banned from selling securities.
The military response has
also been dramatic. Most
surprising was the German government's decision to reverse itself and send
weapons and fuel to Ukraine. German Chancellor Scholz also committed 100 bln
euros to modernize its military this year and, by 2024, spend at least 2% of
GDP on defense. US presidents have been haranguing Berlin for this for
more than a decade. Many other countries committed to sending weapons, and the
EU announced it would send fighter jets, a significant escalation. Sweden has also eschewed its neutrality and sending weapons to Ukraine. A
new "arsenal for democracy" is born. Turkey recognized over the
weekend that Russia's invasion of Ukraine constitutes a war, allowing it to
block Russian warship transit through the Turkish straits and into the Black
Sea. Meanwhile, US intelligence estimates that Russia has deployed about
2/3 of its forces. Putin put Russian nuclear forces on higher alert,
which did not help risk appetites. He also fired his military Chief of Staff
Gerasimov, and some reports linked it to the nuclear decision.
The euro fell to almost
$1.1120 in the initial sell-off when traders first reacted to the weekend
developments. Last
week's low was slightly above $1.1100. It recovered to about $1.12 before
stalling. Around 1.5 bln euro options at $1.1250 expire today. While we
suspect the euro may have a bit more room on the upside today, that may be too
far away to be impactful. We note that Spain today followed France before
the weekend in reporting higher than expected February CPI figures today (0.7%
vs. Bloomberg median forecast of 0.4%). The harmonized year-over-year
pace rose to 7.5% from 6.2%. Germany reports its figures tomorrow ahead
of the aggregate report on Wednesday. Sterling fell to almost
$1.3310 initially. Last week's low was slightly below
$1.3275. It has recovered to trade to almost $1.3390 in the European
morning. The session high may not be in place yet. We see a cap
around $1.3425 today.
America
The US reports the January
advanced goods trade balance, inventory data (wholesale and retail), and the
Dallas Fed's manufacturing survey. Recall that in December, the US goods
deficit hit a record of almost $100.5 bln. A small improvement is
expected in January. Inventory accumulation accounted for around 70% of
the rise in Q4 21 GDP. We suggest the inventory cycle is maturing and
will not be that tailwind going forward. Inventory growth may continue
here in early 2022, but not nearly at the same pace. The highlight of the
week is the national jobs report on Friday, where the median forecast is for a
400k increase after 467k in January.
The Federal Reserve two-day meeting
concludes on March 16.
The odds of a 50 bp move have fallen sharply, from more than 80% before the US
warning that a Russian attack could take place at any time on February 11 to
less than 17% chance now. At least five Fed officials speak this week,
starting with Bostic later today. Three events stand out. First, Chair
Powell testifies before Congress on Wednesday and Thursday. Second, the
Beige Book will be released on Wednesday. Third, also in the middle of
the week, the Fed's Logan discusses the Fed's asset purchases. Logan is
the Manager of the System Open Market Account (SOMA).
Canada reports the Q4
current account balance and industrial/raw material prices. These are not the stuff that
typically moves the market. Tomorrow, it will report Q4 GDP, which may
show a flat December. The highlight of the week is the Bank of Canada
meeting on Wednesday. The swaps market has downgraded the chances of a 50
bp to less than 60% from around 75% before the weekend. On balance, we
expect a 25 bp move and forward guidance that suggests the balance sheet can
begin shrinking in Q2.
Mexico reports the January
unemployment rate, which likely rose for the first time in six months. Worker remittances are due tomorrow
and may have slowed to around $4.2 bln from $4.76 bln in December. Last
January, worker remittances were a little shy of $3.3 bln. They averaged
$4.3 bln last year and almost $3.4 bln in 2020. In 2018-2019, they
averaged $2.8-$3.0 bln a month. The economic data highlights for Brazil
this week include the February trade balance, which should jump back into
surplus from the small deficit in January and Q4 21 GDP (small expansion
expected).
The US dollar is within the
pre-weekend range (~CAD1.2695-CAD1.2820) against the Canadian dollar. It initially pushed above CAD1.28
but has come back off to CAD1.2740. More gains can be pared but support
is seen in the CAD1.2720 area, which may be sufficient today. Options for
about $625 mln at CAD1.28 expire today. The greenback is more
resilient against the Mexican peso. It found support near
MXN20.4765 and took out the pre-weekend high (~MXN20.58) to see
MXN20.6555. Last week's high was set closer to MXN20.7855. While the
US dollar's gains may be pared more, support today may be seen ahead of
MXN20.40.
Disclaimer
Reviewed by Marc Chandler
on
February 28, 2022
Rating:
