Overview: The market appears to be judging the
initial salvo of sanctions against Russia for formally recognizing the
separatist regions in Ukraine as modest at best and has preceded to take on
more risk. Tokyo markets were on holiday but the other major equity markets
in the region rallied and the MSCI Asia Pacific Index rose for the first time in
four sessions. Led by consumer
discretionary, materials, and staples sectors, the Stoxx 600 is rising for a second session. US
futures are 0.65%-1.0% higher. The NASDAQ has a four-day losing streak in
tow. Benchmark bond yields are firmer. The US 10-year yield is up
about three basis points to 1.97%. European yields are narrowly mixed. Australia and New Zealand benchmark yields rose 7-9 bp, reflecting some
catch-up, but also the Reserve Bank of New Zealand's rate hike and more aggressive
forward guidance. The more robust appetite for risk is helping lift the
dollar-bloc and Scandi currencies, while the Japanese yen is flat. Most emerging market currencies are firmer, but
the Russian rouble is off about 1%, after advancing a little more than 1%
yesterday. Gold’s appeal has diminished after trading a little through
$1914 yesterday and may be vulnerable to test the recent lows near $1885. Crude oil
is consolidating. In the past two sessions, the April WTI contract has
traded between roughly $87.50 and $95.00. It is hovering around the
middle of that range (~$91.50). US natgas prices are a little softer, but
Europe's benchmark has jumped over 12%. Iron ore prices rose almost 2%
earlier today, while copper's three days fall maybe snapped today.
Asia Pacific
As widely expected, the
Reserve Bank of New Zealand hikes its cash target rate by 25 bp to
1.0%. Officials
expected the key rate to stand at 2.50% in 12-month, but now sees a peak at
3.25% by the end of next year, 75 bp higher than previously. It also
announced that it will begin a gradual reduction of its balance sheet in July
by selling NZ$5 bln per fiscal year. In addition, it will not reinvest
proceeds from maturing holdings. The hawkish posture was underscored by
the acknowledgment that the 25 bp hike was "finely balanced" and that
the RBNZ is raising rates quicker, if required. Some observers see the
comment as a hint of a 50 bp move in May. New Zealand is experiencing an
Omicron wave while the economy is strong. Unemployment stood at a record
low of 3.2% in Q4 21, and inflation is running just below 6%. That said,
the RBNZ projects growth of about 5.3% in the year through next month, while it
cut is growth forecast for the next fiscal year to 2.9% vs. 4.2%.
Australia reported Q4 21
wage growth of 0.7% after a 0.6% increase in Q3 21. The year-over-year rate edged up to
2.3% from 2.2% and missing the median forecast in Bloomberg's survey of
2.4%. The market's initial reaction was to take the three-year yield down
six basis points and the Australian dollar wobbled. The Reserve Bank of
Australia meets next week. The market looks for a rate hike around the
middle of the year, but the central bank is less sanguine. Governor Lowe has
allowed for a rate hike before the end of the year, if wages continue to
accelerate.
The dollar bounced off of
JPY114.50 yesterday and settled a little above JPY115.00. The yen is sidelined today, with
Tokyo out. The dollar has been trading in less than a 20-pip range and unable so far to take out yesterday's high near JPY115.25. Rising US
yields and equities would seem to favor a stronger greenback. The
Australian dollar closed above $0.7200 for the first time yesterday in a month
and follow-through buying has lifted it to nearly $0.7270, its highest level
since January 20. A band of resistance is seen between $0.7280 and
$0.7315, the high for the year so far. At the end of January, the Aussie had
fallen below its lower Bollinger Band, and now it is toying with the upper Band
(~$0.7265). The intraday momentum indicators are stretched. The
greenback fell to new four-year lows against the Chinese yuan today
(~CNY6.3140). The lows from early 2018 were CNY6.24-CNY6.25, but
there is talk of a move toward CNY6.20. Even though a couple of large US
asset managers have reduced their exposure, foreign demand remains
strong. On top of its large trade surplus, foreign portfolio investment
flows are robust. The PBOC again set the dollar's reference rate weaker
than the bank models (Bloomberg survey) projected: CNY6.3313 vs.
CNY6.3330.
Europe
The threat of devastating
sanctions on Russia looks wide of the mark. The measures announced are being judged to
be mild. For example, the US prohibition of buying Russian bonds in the
secondary market complement the restrictions in the primary market, but it does
not impact current holdings. At the end of last year, US investors held
about $14 bln in long-term Russian bonds. The sanctions on a few elites
may be inconvenient but hardly significant. The largest Russian banks
were not targeted, but a few state-owned banks were. Some sanctions by
the UK seemed to target some that the US had previously sanctioned. We
suspect that these moves were among the more modest measures that Russia had
anticipated. At the same time, reports suggest that Russian forces were
already in the separatist regions, so outside formally recognizing the
separatist regions, it is not clear yet what has materially changed on the
ground. This appears to be dividing the risk assessment, with some in
Europe not seeing it as an invasion.
Austria's central bank chief
Holzmann, a noted hawk, is pushing two initiatives. First, he continues to argue in
favor of hiking rates while the bond buying continues. ECB President
Lagarde has pushed against this sequencing. Recall that the BOE had
briefly toyed with hiking amid QE but ultimately finished its bond buying
before hiking rates. Second, Holzmann saw a possibility of a hike at the
end of the summer and another one before year end. A Reuters survey found
a median expectation for the ECB's bond buying to wind down in Q3 and a hike in
Q3/Q4.
Since the US warning on
February 11 that Russian military action was imminent, the euro has chopped in
a $1.1280-$1.1400 trading range. It tested the lower end yesterday before recovering.
Follow-through buying lifted the single currency to almost $1.1360 in the
European morning. Yesterday's high was a slightly above $1.1365. The
intrasession momentum indicators are over-extended, suggesting the upside will
likely be limited in the North American morning. Sterling found
support yesterday around $1.3530 and recovered to test $1.36. It
is pushing higher today but the market seems hesitant to challenge the recent
highs in the $1.3640 area. Here too the intraday momentum indicators are
stretched. Initial support is seen around $1.3580.
America
The US economic calendar is
light today. The
weekly mortgage applications report and the Fed's Daly late in the US session
are the highlights. Treasury also sells a two-year floating rate note ($22
bln) and five-year notes ($53 bln). Yesterday's $52 bln sale of two-year
notes was well received. The sale was covered 2.64x and the indirect bidder
took down almost 2/3 and direct bidders almost a fifth. Dealers absorbed a little more than 15%, the least in many years. Meanwhile, the US
2-10-year yield curve continued to flatten. It fell through 39 bp for the
first time in two years yesterday. Recall that near 78 bp at the end of
last year. It peaked at the end of March 2021 a little below 160 bp. It
was a near 130 bp at recently as last October.
Like the US, Canada also has
a light economic diary today. However, Mexico and Brazil are busier. Mexico reports
the biweekly CPI reading through the middle of February. This measure of
inflation has drifted lower since the end of last November. However, it
remains above 7% and the downdraft is expected to have ended after falling
to 7.01% at the end of January. The median projection in the Bloomberg
survey looks for 7.17%, which would be the high so far this year. Mexico
also reports December retail sales. A 0.3% rise is expected after a 0.9%
increase in November. Banxico does not meet for a month and the market
leans toward a 25 bp hike after two 50 bp hikes in a row.
Brazil reported its IPCA
inflation measure.
It fell from 10.73% in November 2021 to 10.20% in January 2022. After two
months of improvement, prices are expected to have risen by 10.63% this month
(median in the Bloomberg survey). The Selic rate stands at 10.75% and the
swaps market is pricing in another 200-225 bp hikes in the next six months, and
some are looking at the first cut either late this year or early next
year. Meanwhile, foreign inflows into Brazil's equity market remains
strong (~BRL64 bln or ~$12.7 bln over the past two months). The Bovespa is one
of the best performing equity markets this year, up 7.7% through yesterday and
year-to-date the Brazilian real is the strongest currency in the world, rising
by about 10.2% coming into today.
The US dollar approached the
upper end of this month's range against the Canadian dollar near
CAD1.28. It
has come back offered today in line with the stronger risk appetites. It
is testing the CAD1.27 area. The lower end of the recent range is around
CAD1.2660. The Bank of Canada meets next week, and the swaps market has a
nearly 70% chance of a 50 bp hike discounted. It may also announce that it will allow its balance sheets to gradually fall starting in April or
May. The greenback settled below the 200-day moving average against the
Mexican peso for the fifth consecutive session yesterday. It is sitting
just above the low for the year set last week near MXN20.2360. There is little
on the charts until closer to last October's low near MXN20.12. On the
upside, the MXN20.28 may offer initial resistance.
Disclaimer
Reviewed by Marc Chandler
on
February 23, 2022
Rating:
