Overview: While the World Health Organization
debates about downgrading Covid from a pandemic, the rise China and Hong Kong
cases is striking. A lockdown in Shenzhen and restrictions in Shanghai,
coupled with a record fine by PBOC officials on Tencent drove local stocks
sharply lower. China's CSI 300 fell 3% and a measure of Chinese stocks
that trade in HK plunged more than 7%. The Hang Seng itself dropped
5%. Covid in China and Hong Kong adds to the risk of more supply chain
disruptions. Europe's Stoxx 600 is up about 1.6%, led by financials and
industrials. US futures are 0.5%-0.7% better. Bond markets
are sliding. Yields are 8-10 bp higher in European. The US 10-year
Treasury yield is near 2.10%. It rose slightly more than 25 bp last week
and is up 10 basis points today. The US 5-year yield is pushing above 2%
today for the first time since May 2019. It is the sixth consecutive
advance. The dollar is sitting at the fulcrum today. The Scandis
and Euro are advancing, while the dollar-bloc and yen are softer. The greenback pushed above JPY117 at the end of last week and has
approached JPY118 today. Among the emerging market complex, the beleaguered
central European currencies are snapping back today. The Hungarian
forint, Czech koruna, and Polish zloty are up more than 1% today. The JP
Morgan Emerging Market Index has a three-week, roughly 6.5% slide in tow.
It is up about 1.1% today. Gold is heavy near $1960 after peaking last
week around $2070. Support is seen in the $1950-$1958 band. April
WTI is also slipping lower after meeting resistance near $110. Last
week's low was slightly above $103. US natgas prices are around 2.3%
lower after falling 5.8% last week. Europe's benchmark is off 15% after
plummeting more than 34% last week. Iron ore is off 7%, falling for its
fifth consecutive session. Copper is trading lower as well. It has
fallen in five of the past six sessions. May wheat is softer. It
fell 8.5% last week.
Asia Pacific
US National Security Adviser
Sullivan is meeting with his Chinese counterpart Yang today. The last meeting was in October. The
ostensible purpose is to exchange views on global and regional issues.
The media has played up the diplomatic language of the statement that
followed last month's meeting between Putin and Xi claiming a "friendship
with no limits." The media wants to take it at face value, yet
it knows it to be misconstrued. Consider, for example, that media reports
also reveal that Russia sells weapons to India to help it fight China.
"No limits?" Sullivan was also clear that thus far there is no
evidence that Beijing is trying to circumvent the sanctions. That said,
last week the US warned Chinese chip makers against supplying Russia with
products that were subject to export controls. Affirmation through
negation. Other US officials say that Moscow has reached out to Beijing
to secure military equipment, even though part of the logistical problem
Russian forces are experiencing appears to be coming from shoddy parts (e.g.,
tires) made in China. Reports suggest that since doubling the
yuan-rouble band to 10%, there has not been an increase in
turnover.
There seems to be a debate
over how much China knew of Putin's intentions. Some US officials seem to think
China may have been aware that Putin was planning something, but may not have
known the full extent. Beijing cannot be happy with what is happening,
even the European theater was need new resources that could have otherwise been
used to check China in the Asia-Pacific region. The challenge posed by
higher commodities is not inflation so much in China, where the CPI is less
than 1% and PPI has fallen for four consecutive months. The challenge is
growth. The 5.5% target will be more difficult to meet. From Beijing's
vantage point, the unprecedented swift and broad sanctions on Russia
strengthens US-European ties. Xi has been reaching out to European
leaders since Russia invaded Ukraine trying to strengthen ties. At the same
time, Japan, Singapore, Taiwan, and South Korea (which has a new president
whose rhetoric is more confrontational to Beijing) appear on a heightened
sensitivity to China's actions in the region. China sees a web of US
relationships that are tantamount to a Pacific NATO: 5-4-3-2...Five Eyes
(Australia, New Zealand, Canada, UK, and the US), the Quad (Australia, India,
Japan, US), AUKUS (Australia, UK, US), several bilateral security pacts
including Japan, South Korea, Philippines.
The headwinds to China's
growth (domestic challenges include the property market and the crack down on
technology, and the social restrictions associated with Covid) have mounted. The front page of China's
Securities Journal suggests the PBOC could cut rates to support the
economy. There is heightened speculation that a cut could come as early
as tomorrow when the 1-year Medium-Term Lending Facility is set. Many now
look for a 10 bp cut to 2.75%. Recall it was cut 10 bp in January, which
was the first cut since the two reductions in the first four months of 2020
(cumulative 30 bp). China's 10-year yield fell for the third day
today and near 2.76%, is the lowest in a month. The Chinese premium over
the US has narrowed to about 72 bp from over 105 bp at the start of last
week.
The dollar reached almost
JPY117.90 earlier today as it extends last week's breakout. The JPY118 area offers the nearby cap, but
the charts suggest scope may exist toward JPY118.60. Initial support is
seen in the JPY117.40-JPY117.50 band. The key seems to be rising US
yields more than the firmer tone in equities. The Australian
dollar reversed lower last Monday and with today's low near $0.7235 nearly
completed a (61.8%) retracement of the gains scored since the Russian invasion
(~$0.7225). The selling pressure may have burnt itself out, the
Aussie needs to push above $0.7280-$0.7300 to lift the technical tone. In
a rare occurrence, the US dollar gapped higher against the Chinese yuan. The
gap appears on the weekly charts, which give it added importance. The dollar's
pre-weekend high was just shy of CNY6.34 and today's low was slightly above
CNY6.3450. It reached nearly CNY6.3625 before steadying. The
PBOC set the dollar's reference rate at CNY6.3506, well above the CNY6.3356
median projection in Bloomberg's survey. Last month's high was a little
north of CNY6.37 and the year's high was set in early January slightly below
CNY6.3850.
Europe
There were some outstanding
issues between the US and Iran in resurrecting the 2015 accord, but the talks
were suspended. Russia,
which plays an important role here (perhaps, as one observer suggested,
receiving shipment so enriched uranium from Iran), wants guarantees that US
sanctions would not affect Iran's planned economic and commercial ties.
The US refuses. Iran's uranium enrichment has gone forward. Iran
wants a guarantee too that the US does not leave the pact again. Europe
has been nursing the talks which the US does not participate in directly.
The failure to return to the 2015 pact would force another issue to the
fore: Iran's advancing nuclear program.
Some suggest that Russia
would not have attacked Ukraine if Kyiv has retained the nuclear weapons from
the Soviet era.
Maybe. It is worth thinking about, but nuclear powers have clashed
without the resort to weapons of mass destruction (e.g., India-Pakistan,
India-China). Russia has not directly attacked a NATO member.
Russia claims that convoys carrying western military supplies are legitimate
targets. This is one scenario for the broadening of the war.
Russia's bombardment of western Ukraine was approaching the Polish
border.
Russia is threatening to
arrest corporate leaders and seize assets of businesses that a critical of the
war or suspending activity. Meanwhile, there is much discussion about the
nearly $120 mln in coupon payments due Wednesday. While the indicative pricing in the
credit default swaps market is consistent with an imminent default, there is a
grace period that should not be forgotten. This means that a formal
default is not likely this week.
The euro initially extended
its pre-weekend losses and slipped briefly below $1.09, where a 1.8 bln euro
option expires today. It
has recovered to almost $1.0970. The intraday momentum indicators are stretched,
and nearby resistance is seen in the $1.0980-$1.1000 band. The
pre-weekend high was close to $1.1045. Sterling's recent losses
were extended to almost $1.30 today, but it also stabilized and returned to the
$1.3060 area. While a move above there would target $1.3100, it
seems too far away given the extended intraday momentum readings.
Tomorrow the UK reports employment figures but the highlight is the BOE meeting
on Thursday that is widely expected to deliver another 25 bp hike.
America
The focus is of course on
the FOMC meeting that concludes at midweek. However, ahead of it, there are
several high-frequency economic reports. These include the March Empire
State manufacturing survey and February PPI tomorrow. Producer price
inflation accelerated, with the headline expected to reach 10%. The
Empire State manufacturing survey is forecast to have improved, but we are
concerned that the magnitude of the slowdown in Q1 is still not fully
appreciated. February retail sales will be released before the FOMC
meeting concludes on Wednesday. A small gain is expected after a 3.8%
surge was reported in January.
Canada reported monster jobs
data ahead of the weekend. Employment jumped 336.6k, well above the 127.5k
median forecast in Bloomberg's survey. Full-time positions alone surged 121.5k. The
unemployment rate fell one percentage point to 5.5% and the participation rate
jumped to 65.4% from 65.0%. Wages for permanent employees accelerated to
3.3% from 2.4%. The highlight this week is the February CPI report due in
midweeks. The headline pace likely picked up to 5.5% from 5.1% and the
underlying core measures also probably accelerated.
Brazil's IPCA February IPCA
inflation accelerated to 10.54% from 10.38%. This was a little ahead of expectations. It
likely solidifies expectations for a 100 bp hike a few hours after the FOMC
delivers its first hike in the middle of the week. Mexico has a light
economic calendar this week, but Banxico is likely to hike 50-75 bp next
week.
The Canadian dollar is
trading quietly within the pre-weekend range
(~CAD1.2695-CAD1.2795). The macro story seems mostly constructive, but the US two-year
premium over Canada is a negative development. The upticks in the US
S&P 500, a proxy for risk, do not seem to be offering the Canadian dollar
the support that it has in the recent past. Initial support is seen near
CAD1.2720. The greenback is testing support near MXN20.85.
The MXN20.81 area corresponds to the (50%) retracement of the dollar's gains
since the war began. Below there, support is seen in MXN20.63-MXN20.65
band.
Disclaimer
Reviewed by Marc Chandler
on
March 14, 2022
Rating:
