Overview: Yields
are surging. Canada and Australia's two-year yields have jumped 20 bp, with
the US yield up 10 bp to 2.37% ahead of the $50 bln sale later today.
The US 10-year yield has risen a more modest three basis points to 2.50%,
flattening the 2-10-year yields curve. The 5–30-year curve has inverted
for the first time since 2016. European 10-year benchmark yields have
risen 3-7 bp. Tech stocks helped power the Hang Seng and Australia eked
out a small gain, but most equity markets in the Asia Pacific region sold
off for third consecutive session. Led by financials, utilities, and communication, the Stoxx 600 has risen by about 0.75% in the European
morning. US futures are trading with a heavier bias. The greenback
is firm, with the yen again under the most pressure. It is trading
briefly above JPY125 in late morning activity in Europe, before pulling back. The Australian dollar
is the only major currency higher on the day. Emerging market currencies
are mostly lower. The South Korean won, and Thai baht are hardest hit
alongside the Polish zloty. The jump in yields takes some shine off
gold, which reached $1966 last week. It is now straddling the $1930 area. The
$1900 area may offer important support. The lockdown in Shanghai is
sparking concerns about oil demand. May WTI is off almost 4% after last
week's 10.5% rally. There is also speculation (hope) that OPEC+ agrees to
boost output at this week's meeting. US natural gas prices are little changed after rising in every session last week. Europe's
benchmark has risen by a little more than 8% today after falling 2.4% last week. Iron ore is a little
firmer, while copper is falling for the third session in a row. May wheat
is offered, giving back 2.4% after last week's 3.6% a rally.
Asia Pacific
The Bank of Japan entered
the market to reinforce the 0.25% cap of the 10-year yield. Its first offer to buy an unlimited amount
of bonds failed to draw any interest. The second attempt had to buy
JPY64.5 bln (~$525 mln). The BOJ recognizes it is engaged in a struggle
now and has pre-announced will be there for the next three sessions.
Separately, we note that according to the latest Nikkei poll, support for Prime
Minister Kishida has risen six percentage points to 61%, with high marks given
for handling the Russia's invasion of Ukraine.
On the one hand, China
rejects the sanction regime against Russia, it says, because it is being
imposed with a UN resolution. On the other hand, reports suggest that Beijing and mainland
companies are asking US officials for clarification with the idea in mind to
understand what is permitted. China and India purchases, for example, of
Russian oil is not violating the sanctions.
There was thought that China
would abandon its strict zero-Covid course. Some suggested that the easing of
restrictions in Hong Kong could be a prelude to a change by Beijing.
However, that does not appear to be the case. Yesterday, Beijing
announced a lockdown of Shanghai, China's largest city (population estimated around
25 mln). The eastern half of city will be locked down for four days
starting today. This covers the financial district. The purpose is
mass testing. The western half of the city will be locked down as of
April 1. Residents will be barred from leaving home and public
transportation and ride-hailing services will be halted. A record 5500 cases
were said to have been reported on Saturday. Recall that earlier this month,
Shenzhen, an important tech hub was locked down.
The BOJ's defense of its
Yield Curve Control policy in the face of surging global yields and especially
US rates keeps the yen on the defensive. The yen edged higher at the end of last week for the first
time in six sessions, but its losses have accelerated today. As we have
noted the last significant high was in 2015 and then the greenback reached
about JPY125.85. The notable high before that was in 2002, a little above
JPY135. The Australian dollar is firm. It posted a marginal
new five-month high near $0.7540. It is approaching last October's
high by $0.7550. It is the fifth consecutive advance, if sustained, and
it would be the ninth gain in the past 10 sessions. The positive
terms-of-trade shock seems to the be chief driver. A pre-election due
first thing Wednesday in Canberra is expected to include a cut in the fuel tax
for six months, support for first-time home buyers, and boost funds for roads
and rails. The election is expected to be called by late May. The
greenback gapped higher against the Chinese yuan, reaching a little more than
CNY6.3810, but has subsequently trended lower to fill the nearly fill the gap
(the pre-weekend high) by CNY6.3680. The PBOC's reference rate for
the dollar was lower than the Bloomberg survey anticipated (CNY6.3732 vs.
CNY6.3740).
Europe
In an unexpected turn of
events, Germany's Economic Minister Habeck, a member of the Green Party,
suggested that he is open to re-examining the decision to close the county's
remaining three nuclear plants later this year. Previously, the Greens and Habeck ruled
out this option. Still, the surge in energy prices and the belated
efforts to reduce its dependence on Russia is pushing the pragmatic Greens
(realos) in this direction. Merkel's push to close the nuclear energy
plants after Japan's nuclear accident in 2011 resulting in increased reliance
on Russia and spurred the Nord Stream 2 pipeline.
Among the scenarios that
were bandied about before Russia's invasion of Ukraine was that it could pursue
a limited objective of securing the entire regional claims Donetsk and
Luhansk. Since
the war began, Western sources has played up different scenarios, one of total
occupation of Ukraine. The narrative it tells now is that after having
suffered some significant setbacks, for which the higher range of estimates
suggest Russia has lost as many soldiers (15k) in Ukraine as it did in 10 years
in Afghanistan. Russia admits to less than a tenth of those estimated
deaths in Ukraine. Even taking into account the number of injuries inflicted,
the lower bottom of NATO's range is (7k). It is quite
clear that both sides have it in their interest to, shall we say, see what they
want. Still, the point now is that Russia's 1st Deputy General of the
Chief of Staff suggested Russian forces will focus on gaining the full
control of the Luhansk, for which it may be nearly there, and Donetsk, which is
thought to be a little more than half secured. The idea is that when the
territory is militarily secure, a referendum would be held to formally join
Russia. Strategically, a land-bridge to Crimea will also be
secured.
The euro was sold to an
eight-day low near $1.0945 after holding above $1.0960 last week. It popped up in early European
turnover to the session of just below $1.10. That is an important level
in the coming days, with large options expiring there. The nearly 585 mln
euro expiry today is the smallest. Tomorrow's expiring options are for
almost 2.5 bln euros and the same for Wednesday ahead of Thursday's nearly 2.9 bln
euro expirations. If the upside is blocked, look for a test on $1.09 and
below there is this month's low slightly ahead of $1.08. Sterling
is testing last week's low by $1.3120. A break targets the
$1.3070 area, and possibly $1.30, which was seen in the middle of the month. It
last traded below there in late 2020, when it found a base around
$1.2880.
America
The US Treasury indicated
that Russia could use frozen funds to make debt payments until May 25. Next Monday, there is a $2.2 bln debt
servicing payment due. Some covenants allow for the rouble payments, but
these reportedly do not. After May 25, it needs to raise money other
ways, including selling its oil and gas. Over the weekend, President
Biden implied relations with Russia cannot be normalized while Putin is in
control. It was later walked back by Secretary of State Blinken. However,
with the US claiming Putin is a war criminal, it is hard not to conclude that
the US seeks regime change. Some might find the US assertion of war
crimes more powerful and compelling if Washington or Moscow were signatory
members of the International Court of Justice. If you are keeping records
of such things, Beijing is not a member either. The ICJ does not have
authority over non-members.
President Biden is
struggling in the polls. His support is around 40%, near the levels that Trump
experienced at the same time of his presidency. One poll found that some
70% have little confidence in his handling of Russia and the war. This suggests
that his base has also softened. Meanwhile, Biden is expected to unveil
new budget proposals, which will include record spending for "peace"
time. He is expected to formally endorse the previous Senate Democrat
proposal for a "billionaires' tax that would be extended to unrealized
gains. It is said to raise $360 bln over the next 10 years. At the
same time, without the Covid-related spending and income replaces, the budget
deficit will be projected to fall. The median forecast in Bloomberg's
survey has the budget deficit falling to 5.1% of GDP this year form 10.8%
last. Lastly, there seems to be a misunderstanding about trend
growth in the US. Some observers talk about a growth recession as the
most likely or best outcome that can be anticipated. Yet the 2% pace or
so bandied about can hardly be called a "growth recession” because for the
Fed this would simply be a return to trend growth. The Fed estimates that
the long-term growth rate is 1.8%-2.0%.
On tap today is the US
February advanced goods trade balance. It was a record deficit in
January. Wholesale
and retail inventories are also due. Retail inventories rose by an
average of 2.3% a month in Q4 21. They are expected to have risen by
about 1.4% after January's 1.9% increase. Wholesale inventories rose by
an average of 2.2% in Q4 21. They are rising at about half that
pace in the first two months of Q1 22. We have noted that the
inventory cycle is maturing, and it will not provide the tailwind as it did previously,
and especially in Q4 21. The Dallas manufacturing survey is expected to
have soften a little.
The US dollar has a nine-day
drop in tow against the Canadian dollar coming into today's session. It is pinned near the pre-weekend
low around CAD1.2465. It has not been above CAD1.2505 today. We
anticipate some near-term consolidation that could see the greenback trade
toward CAD1.2520-CAD1.2540. The US dollar is poised to snap an 11-day
slide against the Mexican peso. During that run, the greenback fell from
around MXN21.06 to about MXN19.91. It has been up to MXN20.12 today and
since then it has found support ahead of MXN20.00. We suspect near-term
potential extends into the MXN20.20-MXN20.22 area.
Disclaimer
Reviewed by Marc Chandler
on
March 28, 2022
Rating:
