Overview: What would it look like if Russia
was on the verge of attacking Ukraine? Cyber-attacks. Check.
Violation of the cease fire with the separatist regions. Check.
Almost 2000 such violations were recorded on Saturday alone, according to the Organization for Security and Co-operation in Europe. Extending the military
exercises with Belarus. Check. However, just as Asian markets were
opening, Macron's proposal for a Biden-Putin summit were accepted in principle.
Still, risk appetites remain muted. The MSCI Asia Pacific Index extended
last week's 0.9% fall. The Stoxx 600 Index is nursing modest losses near
midday after falling almost 1.9% last week. It has risen only one week so
far this year. US futures are narrowly mixed though stock and bond
markets are closed today. European bonds yields are 2-4 basis points
firmer. Perhaps, it is in the foreign exchange market where risk appetites
appear the strongest. The dollar is offered against most currencies
today, and the Japanese yen is a laggard. The Australian dollar and
Scandis lead the advance. The Swiss franc is also one of the strongest majors. Among emerging market currencies, the central European currencies are the best performers today. The
JP Morgan EM FX index is moving higher for the fifth session of the past
six. Gold initially extended its gains and saw $1908 before returning to
the $1890 area. April WTI is hovering around $90 a barrel. US
natgas is up about 5.3% after losing about that much over the past two
sessions. European natgas is up 1.7% after falling 2.8% before the
weekend. Iron ore prices jumped 4.6% to recoup a chunk of last week's 11%
slide. Copper is firmer for the first time in three sessions.
Asia Pacific
Japan's preliminary PMI
underscores expectations that after rebounding in Q4 21, the world's third-largest
economy is struggling at the start of 2022. New covid restrictions imposed in late
January are taking a toll. The manufacturing activity slowed. The manufacturing
PMI fell to 52.9 from 55.4. Services disappointed. The
services PMI dropped to 42.7 from 47.6, and this kept the composite PMI well
below the 50 boom/bust level at 44.6 from 49.9.
Australia's flash PMI was
better. The
manufacturing reading rose to 57.6 from 55.1. The service PMI jumped to
56.4 from 46.6. The composite recovered to 55.9 from 46.7. The
Reserve Bank of Australia meets on March 1. The market has a rate hike priced
into the July, which the Governor Lowe has pushed against.
The dollar is holding below
JPY115.00 in the European sessions after peaking near JPY115.10 in Asian
turnover. Initial
support is around JPY114.80, the pre-weekend low has been testing it. Below
there, nearby support is seen around JPY114.60, and a break could spur a move
toward JPY114.00-JPY114.20. The Australian dollar is trying again
to secure a foothold above $0.7200. It traded above there on an
intrasession basis for the past three sessions, but a close above there has
been elusive for a month. The next upside target is the spike high earlier this
month to almost $0.7250. The Chinese yuan is among the weakest currencies
today. It is off about 0.15%. The US dollar initially drew
closer to CNY6.32 before rebounding nearly to the pre-weekend high
CNY6.3365. After setting the dollar's reference rate for the past four
sessions, lower than the Bloomberg survey projected, the PBOC returned to its
more normal practice. The dollar was fixed at CNY6.3401compared with the
Bloomberg survey median of CNY6.3388. The loan prime rates were left
unchanged, as widely anticipated. Note that the 10-year Chinese bond
yield rose nearly four basis points to 2.83%. The biggest state owned
banks cut mortgage rates for home buyers in Guangzhou, which followed last
week's report that lending in other cities were reducing down payment
ratios.
Europe
The eurozone aggregate flash
February PMI was stronger than expected. The manufacturing PMI slipped slightly but
at 58.4 (from 58.7) remains at elevated levels. The service PMI rose to
55.8 from 51.1, which lifted the composite to 55.5 from 52.3. Prices
jumped by a record amount. The preliminary German readings were in line
with the aggregate. Manufacturing slowed slightly (58.5 from 59.8), while
service activity accelerated (56.6 from 52.2). The composite rose to 56.2
from 53.8. In France, the services PMI surpassed the manufacturing PMI as
the post-Covid recovery strengthened. The manufacturing PMI rose to 57.6
from 55.5. The services PMI rose to 57.9 from 53.1. The composite
stands at 57.4 after 52.7.
The UK's manufacturing PMI is steady at 57.3.
The market had seen the risk of a small decline. The services PMI surged
to 60.8 from 54.1. This lifted the composite PMI to 60.2 from 54.7.
It is the highest since last June. A week ago, the swaps market had discounted about an 80% chance of a 50 bp hike at the mid-March BOE meeting (March
17). It has been downgraded to about 37% chance.
The euro has covered the
past three-day range today. It initially took out the pre-weekend low to draw nearer
$1.13 before rebounding to almost $1.14 in late Asian turnover. It was
met by a wall of sellers that knocked it back to $1.1355 before
stabilizing. It has traded on both sides of the pre-weekend range, and
the close is seen as technically important if it is outside of the
$1.1315-$1.1380 range. The possible Biden-Putin summit, provided there is
no invasion, looks likely for next week with the Blinken-Lavrov meeting later
this week setting the stage. Sterling is bid near this month's
highs (~$1.3645). It is also the fourth session of higher lows. The
next target is the 200-day moving average near $1.3685, and it has not settled
above it since last September. Indeed, it has closed above $1.36 only
once in the past month. The intraday momentum indicators suggest the session's
high may be in place.
America
The US stock and bond
markets are closed today. Tomorrow, the flash PMI, house prices, the Conference Board's
consumer confidence survey and the Richmond Fed manufacturing survey are due.
Midweek, Q4 21 GDP is likely to be revised slightly higher. At the end of
the week, the January personal income and consumption figures are
reported. Alongside them will be the PCE deflator. The headline,
which the Fed targets, is expected to rise to 6% from 5.8%. The core
measure, which Fed officials often refer to, is expected to rise to around 5.2%
from 4.9%. Still, the market has downgraded the chances of a 50 bp hike when
the FOMC meeting concludes on March 16. A week ago, the Fed funds
futures were implying about a 65% chance, and now there is less than a 25% of a large
move. A week ago, the market was pricing in about a 50% chance that there
would be 175 bp instead of 150 bp increases this year. Now the market is just
below 150 bp.
Canada has a light economic
diary this week.
The Bank of Canada meets on March 2. The swaps market is pricing in
little more than a 50% chance of a 50 bp hike. A week ago, there was
slightly better than a one-in-three chance. Meanwhile, reports indicate
that the policy has cleared the downtown Ottawa area of protesters.
Nearly 200 arrests were made and as of yesterday, more than 200 bank and
corporate accounts were frozen. Downtown businesses have not yet returned
to normal.
Mexico reports biweekly CPI
figures in the middle of the week. The year-over-year pace is expected to have remained above 7.0%
where is has been since the middle of last November. Still, with a
25 bp hike by the Fed more likely than 50 bp, Banxico, which meets on March 24,
is also likely to hike by a quarter of a point. Recall the last two moves
have been 50 bp. December retail sales, also due on Wednesday, are dated,
while the January trade balance at the end of the week is expected to show
marked deterioration. The week's highlight for Brazil is this month's
IPCA inflation reading (due in the middle of the week), which is expected to
have ticked up to 10.6% from 10.2%.
The US dollar has been
largely rangebound against the Canadian dollar here in February. Support is seen in the
CAD1.2650-CAD1.2660 area. The ceiling is CAD1.28. The broader risk
environment appears to have eclipsed the rate differential driver and the
impact from commodities. Meanwhile, the greenback was sold below
the 200-day moving average against the Mexican peso and continues to hold below it
(~MXN20.3450). Last week's low was about MXN20.2360. There
is little chart support until closer to MXN20.12, the low from last
October. The US dollar fell to almost BRL5.11 ahead of the weekend,
its lowest level since last July. Support is seen in the BRL5.00-BRL5.05
area. Last year's low was set in June near BRL4.8935. Strong
foreign demand for Brazil bond and stocks could fuel a retest.
Disclaimer
Reviewed by Marc Chandler
on
February 21, 2022
Rating:
