Overview: Fears
that the Chinese lockdowns to fight Covid, which have extended for four weeks
in Shanghai, are not working, and may be extended to Beijing has whacked equity
markets, arrested the increase in bond yields, and lifted the dollar.
Commodity prices are broadly lower amid concerns over demand. China's CSI
300 fell 5% today and Hong Kong's Hang Seng was off more than 3.5%. Most
of the major markets in Asia Pacific were off more than 1%. Europe's
Stoxx 600 is off around 1.9% after falling 1.4% last week. US futures are
about 0.7%-0.8% lower. The S&P 500 fell last week for the third consecutive
week, the longest losing streak in 18 months. The US 10-year Treasury
yield is almost seven basis points lower at 2.83%. European benchmark
yields are 4-6 bp lower. The BOJ bought JPY727 bln of 10-year bonds at
the pre-committed fixed rate operation, more than in the previous three
operations last week combined. The yield slipped half of a basis
point. The dollar rides high. It has appreciated against all the major
currencies but the yen. The Australian dollar, Scandis, and sterling have been hit the hardest and are around 0.9-1.2% lower in the
European morning. Emerging market currencies are heavy as well.
Hungary, Mexico, and China have seen their currencies decline by around 1% to lead the complex. Gold fell to new lows for the month around
$1912 before stabilizing. June WTI is 4.3% lower near $97.70 after
falling around 4% last week. US natgas is extending last week's 10.5%
sell-off, while the European benchmark is up 2.5% after a flat showing last
week. Iron prices are off 8.7%, after tumbling closer to 12% at one
juncture today. It fell a little less than 5% last week. Copper is
off around 2.1% after declining about 3% last week. July wheat is up about 0.5% as it tries to snap a four-day slide.
Asia Pacific
China's Covid has emerged as
a powerful economic force in its own right. It is threatening demand for commodities
and threatening to extend supply chain disruptions. Shanghai reported a
record number of fatalities, and the infection is spreading to Beijing.
The Chaoyang district will submit to three days of testing this week for people
who live and/or work in the area. Reports suggest 14 smaller communities
have been sealed and another 14 have imposed limitations on movement.
China's demand for gasoline, diesel, and jet fuel has reportedly fell by 20%
year-over-year, which may translate to 1.2 mln barrels of oil a
day.
The US has threatened
unspecified action if Beijing's new security pact with the Solomon Islands
result in a permanent Chinese military presence. While the US has defended Ukraine's
right to make its own foreign policy decisions, it seems to want to limit
Solomon Island's choices. Prime Minister Sogavare has articulated his own
3 No's Policy. He says that the secret treaty has no provision for a
Chinese military base, no long-term presences, and no ability to project power
from the islands. The Solomon Islands are about 2k kilometers of Australia's
coast.
The dispute over the Solomon
Islands has emerged as a campaign issue in the May 21 Australian elections. Prime Minister Morrison, who seeks
a fourth term, has defended his foreign policy, and tried shifting the focus
back to domestic issues with a promise to cap tax revenue at 23.9% of GDP and
A$100 bln of tax relief over the next four years if re-elected.
Government revenues were 22.9% of GDP in FY21. Labor leader Albanese has
been diagnosed with Covid at the end of last week. This disrupted his campaign
in the tight contest. Morrsion had contracted the disease in early
March.
The dollar initially
approached JPY129 but falling US yields saw it come off and traded below
JPY128, where a $425 mln option expires today. The greenback remains in the range
set last Wednesday (~JPY127.45-JPY129.40). Indeed, it is trading within
the pre-weekend range (~JPY127.74-JPY129.10). The takeaway is
two-fold. First the exchange rate is still closely tracking the US
10-year yield. Second, after surging in March and most of April, the
exchange rate is consolidating. The Australian dollar is falling
sharply for the third consecutive session. It fell 1% last
Thursday and 1.75% before the weekend and is off another 1% today. It is lower
for the 11th session in the past 14. It fell to a two-month low near
$0.7150 in late Asian turnover before stabilizing. The $0.7200 area now
offers resistance. The sell-off of the Chinese yuan
continued. The greenback gapped higher and never looked
back. Recall that the dollar settled around CNY6.3715 on April
15. A week later, last Friday, it settled above CNY6.50 and today, pushed
over CNY6.56. It is the greenback's 5th consecutive gain and today's advance
of a little more than 0.9% is the largest advance since March 2020. The dollar
is trading at its best level in nearly a year and a half. The PBOC set
the dollar's reference rate at CNY6.4909, slightly lower than market
projections (CNY6.4911 in the Bloomberg survey). The next key chart area is
CNY6.60.
Europe
Macron was easily re-elected
with a roughly 58%-42% margin. Partisans, perhaps trying to bolster the turnout and some
press accounts seemed to exaggerate Le Pen's chances. No poll showed her
in the lead. Still, the euro initially trading higher (~$1.0850) before
falling to almost $1.07 before the end of the Asia Pacific session. The
June parliamentary election will shape Macron's second term and his ability to
enact his program. Separately Slovenia voted not to grant Prime Minister
Jansa another term. This further isolates Hungary's Orban. Golob,
the former head of the state-owned power company before dismissed by Jansa,
will lead what appears to be a center-left government.
Last week, Germany's flash
PMI was mostly better than expected. Recall that helped by the surprising gain in the service
PMI, the composite fell to 54.5 not the 54.1 economists expected (median,
Bloomberg survey). Today, the IFO survey was also better than
expected. The current assessment ticked up to 97.2 from 97.1, while the
expectations component rose to 86.7 from a 84.9. The overall business
climate reading rose to 91.8 from 90.8. Separately, the government is
expected to announce a supplemental budget on Wednesday that will boost this
year's net new debt to at least 140 bln euros. This is a 40 bln euro
increase to fund government measures to cushion the impact of the war and the
surge in energy prices. Some of the off-budget 100-bln euro defense
spending initiative will may also be funded this year.
The euro traded to almost $1.0705
in late Asia Pacific turnover, its lowest level since March 2020. There is a 945 mln euro option
struck at $1.07 that expires today. The pre-weekend low near $1.0770 may
now serve as resistance. There are large options at $1.08 expiring over
the next two days (1.6 bln euros tomorrow and 1.2 bln euros on Wednesday). The
Covid-low was set in March 2020 near $1.06. Sterling has been
pounded again. It dropped nearly 1.5% before the weekend, a
roughly two-cent fall that took it to around $.12825. It has lost another
cent today to about $1.2730. While we noted chart support near $1.2700,
the next important chart area is closer to $1.25. It finished last week
below its lower Bollinger Band, and it remains well below it (~$1.2850) today.
In fact, it is more than three standard deviations from the 20-day moving
average (seen near $1.2755).
America
St. Louis Fed President
Bullard opined last week that a 75 bp hike may be needed at some
juncture. He
explicitly said that it was not his base case. Yet some in the markets,
and more in the media seemed to play it up. No other Fed official seemed
to endorse it; Fed futures are pricing in a 51 bp for next week rather than 50
bp. The Fed's quiet period ahead of the May 4 FOMC meeting means no more
official talk. Today's economic calendar features the Chicago Fed's March
national activity index, which is reported with too much of a lag to provide
new insight or a market reaction. The Dallas Fed's April manufacturing
survey is due as well. The early Fed surveys have not generated a
consistent signal. The Empire State survey was stronger than expected
while the Philadelphia Fed survey was weaker than anticipated. The Dallas survey is expected to have
softened.
Canada's calendar is light
until Friday's February GDP print. The Bank of Canada does not meet until
June 1. The swaps market currently has a little more than a 25% chance
that it hikes by 75 bp instead of 50 bp. However, the Canadian dollar
itself seems more sensitive to the risk-off impulse spurred by falling equities
than the policy mixed in Canada.
Mexico reports IGAE economic
activity survey for February. It is too dated to have much impact, and in any event, is
being overwhelmed by the risk-off attitude. The bi-weekly CPI report,
covering the first half of April, released before the weekend, was stronger
than expected. The headline rate rose to 7.72% and the core rate rose
above 7% for the first time in this cycle. It is particularly
disappointing because seasonal considerations, like the summer discount on
electricity taxes, often point to less price pressures. The risk of a 75
bp hike at the May 12 Banxico meeting is increasing.
The US dollar jumped 0.65%
against the Canadian dollar last Thursday and slightly more than 1% before the weekend. It is up another 0.2% in the
European morning to around CAD1.2740, after having approached CAD1.2760 in Asia
Pacific turnover. The greenback finished last week above its upper
Bollinger Band and has spent most of today's session above it (~CAD1.2720).
The market is over-extended but there is little chart resistance ahead of
CAD1.28. The peso's fall is also continuing. The US
dollar traded above its 200-day moving average (~MXN20.42) for the first time
since March 18. It is also above the (38.2%) retracement objective of the
slide since the March 8 high (~MXN21.46), which is found around MXN20.39.
The next retracement (50%) is closer to MN20.60 and the measuring objective of
the potential double bottom is near MXN20.60.
Disclaimer
Reviewed by Marc Chandler
on
April 25, 2022
Rating:
