Overview: Financial strains eased yesterday, and
short-term yields jumped. The two-year US yield jumped 25 bp to pierce 4%. Yet,
the dollar fell against most of the major currencies yesterday and is mostly
softer today. Banking stress is ebbing. The Topix bank index snapped a
three-day decline and jumped nearly 2% today to recoup the lion's share of its
three-day decline. The Stoxx 600 index of EMU banks is extending yesterday's
1,7% advance. The AT1 ETF up about 0.25% after falling by more than 3.6% in the
past three sessions.
Most large bourses in the Asia
Pacific region rose today, led by 1%+ gains in Hong Kong, the mainland shares
that trade there, and South Korea's Kospi. China and Taiwanese markets were
sold. Europe's Stoxx 600 has edged a little higher, while US futures are a bit
softer. Benchmark 10-year yields are 6-10 bp higher in Europe and the US
10-year yield is up a little near 3.54%. Gold is trading lower for the third
consecutive session. It traded above $2000 before reversing lower ahead of the
weekend and slipped to almost $1944 yesterday. It is trading quietly, mostly
above $1950 today. May WTI is extending its recent gains and near $73.50, it is
at its best level in two weeks. Chinese demand and some supply disruptions have
underpinned crude. The 20-day moving average is around $73.35 and it has not
closed above the moving average since March 6. That said, the $74.65 area is
the next important chart area.
Asia Pacific
After being large sellers of
foreign bonds last year, Japanese investors have returned as buyers in a big
way. In the week ending
March 17, Japanese investors bought JPY3.3 trillion (~$24 billion) of foreign
bonds, the most in three years. Year-to-date, Japanese investors have bought
JPY9.6 trillion of foreign bonds. They are buying at nearly twice the pace that
they sold last year. However, not all Japanese investors are buying. Dai-ichi
Life, one of Japan's largest institutional investors (~JPY34 trillion), was
quoted indicating that due to the cost of hedging, it will be shifting more
money to domestic bonds from foreign securities, including US Treasuries. It
will boost its holdings of long-dated JGBS (30-40 years). The cost of hedging
(short-term interest rate differentials) for three-months has risen to around
5% from below 1% at the start of last year. Still, the heavy selling of foreign
bonds last year already shrank Japanese investors exposures. Dai-ichi Life's
hedged foreign bond holdings fell from about 19% of its core unit's portfolio
at the end of March 2021 to 8.6% by the end of last year.
China's long-term yields
(10- and 30-years) are virtually flat on the year as Q1 is drawing to a close. Yet, central government has issued most
bonds on a net basis since at least 1997, when such data was made available. The
net issuance is CNY277 bln (~$40 bln). The gross issuance rose by a little more
than a third from Q1 22 to JPY2.1 trillion. The National People's Congress
released this year's budget, which called increasing the central government's
issuance by around a fifth. In addition to boosting infrastructure investment,
the larger deficit reflects more help to the provincial governments. There has
been a drop in local government land sales, but Finance Minister Lin recently
noted that the impact on revenues may be less than it seems as there are
substantial costs preparing for property sales. This year's quota for special
local bonds, typically used to finance infrastructure projects, was at a lower
level than the actual issuance in 2022. Reports suggest the provinces have been
using their quota quickly.
Despite firm US rates, the
greenback's recovery stalled after reaching about JPY131.75 yesterday. It was sold to around JPY130.50 in
Asia before bouncing back to JPY131.30 in early European turnover. The daily
momentum indicators have not turned higher, but our bias is toward a higher
dollar with an initial target of JPY132.50-80. A break of JPY130.30 would call
this view into question. Subdued Australian February retail sales (0.2%
after 1.8% in January) reinforced ideas that the economy is slowing and that
the RBA is unlikely to raise rates when it meets next week (April 4). Still,
the Australian dollar is trading with a firmer bias but stalled near the
pre-weekend high, slightly below $0.6700, but it looks set to challenge it
again today. It held $0.6670 on the pullback in late Asia turnover and the
intraday momentum indicators have turned higher. Last week's high was near
$0.6760. The Chinese yuan is practically flat today in a narrow trading
range. The dollar has traded between roughly CNY6.8720 and CNY6.8880. The
PBOC set the dollar's reference rate at CNY6.8749 compared with the median
forecast in Bloomberg's survey for CNY6.8749.
Europe
Swiss sight deposits jumped
by nearly CHF52 bln (~$57 bln) last week, the most since 2011, the Swiss
National Bank reported yesterday. This includes foreign banks, but the sight deposits of domestic
institutions rose by CHF40.6 bln. This seems to be a clear indication that the
lenders drew on the emergency liquidity the SNB offered. The domestic sight
deposits stood at CHF540.5 bln, the highest since late last October. This is
similar to the expansion of the Fed's balance sheet from its new lending. The
SNB hiked the deposit rate by 50 bp last week (to 1.5%), and the swaps market
sees scope for at least another 25 bp move and maybe 50 bp.
Amid banking tension, the
euro rallied from almost CHF0.97 on March 15 to CHF1.00 on March 23. However, it posted a key reversal that
day, by making a new high for the move and then settling below the previous
day's low. Follow-through selling saw the euro fall to about CHF0.9850 ahead of
the weekend (as trading in Deutsche Bank stock and derivatives saw heightened
stress). This means that the euro retraced half of its gains before
consolidating yesterday. Given the military developments in Europe, with Russia
announcing it will station nuclear weapons in Belarus, even after the joint
statement with China that "all nuclear weapons states should refrain from
deploying nuclear weapons abroad" and the Ukraine reluctant to start its
anticipate spring offensive without new armaments, many are looking for the
Swiss franc may draw some true safe haven flows. Often, it seems that
what the conventional wisdom call safe haven is more likely the unwinding of
financial structures that use the Swiss franc (and yen) as funding currencies.
Still, the euro is trading higher today against the Swiss franc and a move
above CHF0.9940, the pre-weekend high would lift the technical tone.
The euro extended its
recovery from the pre-weekend low a little below $1.0715. It knocked on $1.08 yesterday and reached
almost $1.0835 today. Last Friday's high was slightly higher (~$1.0840) and
additional resistance is seen near $1.0850. Twice last week, it took out $1.09
intraday but meet sellers that pushed it back. Expiring options at $1.0880
today (~890 mln euros) seem too far away. For its part, sterling rose to
$1.2330 earlier today to approach last week's high (~$1.2345) but has been
unable to sustain the momentum. It has been sold back to $1.2280 in
early European turnover. This has overextended the intraday momentum
indicators, suggesting favorable risk-reward for bottoming picking. Chart
support is seen near $1.2250-60.
America
Ahead his testimony to today
before the Senate Banking Committee, the prepared remarks of the Fed Vice Chair
for Supervision Barr have been released. There did not seem to be any surprises. He pledges that the
central bank will use all of its tools as needed, regardless of the size of the
financial institution, to keep the financial system safe. This is the systemic
threshold and recognizes financial stability as key part of the Fed's mandate. Barr
suggests that officials are considering new measures to prevent what he called
"isolated banking problems" from posing systemic risks. Barr will tell
the Senate that the failure of SVB was a "textbook case of
mismanagement." Interest rate and liquidity risks were not managed
correctly, he will say. Some observers blame the Federal Reserve for raising
rates so aggressively, but Barr notes that the Fed first issued warnings about
SVB's risk-management practices in 2021 and met with senior management in
October last year and expressed its concern about the interest-rate risk. The
Wall Street Journal previously reported that
the Fed had raised questions about SVB's risk-management in 2019. Still,
Barr indicated that the Fed would be proposing "a long-term debt
management requirement" for large banks which are not globally systemic. He
also said the recent experience will improve the stress tests by covering a
wider range of risks and contagions.
Before the weekend, the Fed
funds futures market had discounted about a 1-in-4 chance of a 25 bp hike at
the next FOMC meeting on May 3. Yesterday, there was a 2.7% jump in the KBW bank index, and nearly
as large a rally in Charles Schwab shares, which was the subject of pre-weekend
jitters, and almost a 5% rally in Deutsche Bank shares, which had fallen by
more than 12% in the previous three sessions. The futures market now sees the
chances of a hike in May as a little better than a 50/50 proposition. There is
no FOMC meeting in August, so the implied yield of 4.75% of the August contract
implies a quarter-point cut by early Q3. On March 8, the implied yield was
5.67%. Similarly, the swap market continues to discount a 25 bp cut by the Bank
of Canada at its July 12 meeting. At the end of last week, the market has
discounted 40 bp of cuts by then.
Today's US economic data may
not move the markets much.
The US reports the advanced goods balance for February, and it is expected to
have narrowed slightly. February wholesale investors are expected to have
fallen for the second consecutive month, which would be the first back-to-back
decline since the spring 2020. Some part of this may be reflected in the build
of retail inventories. They are expected to have matched January's 0.2%
increase. House prices are seen continuing to soften in January. Given that
University of Michigan already picked up a small deterioration in consumer
confidence, it would not be surprising if the Conference Board's survey found
the same. The Richmond Fed's manufacturing survey and the Dallas Fed's services
survey draw some passing interest but are also not typically market-movers.
The Canadian dollar was the
strongest G10 currency yesterday, rising about 0.6% against the US dollar. Follow-through US dollar selling
initially took it test last week's low (~CAD1.3630) where it found new bids
that is lifting it toward CAD1.3700 in the European morning. Intraday
momentum indicators are stretched as resistance in the CAD1.3700-20 area is
approached. A move above CAD1.3740 would strengthen the greenback's technical
tone. The Mexican peso managed to marginally extend yesterday's gains, but
selling pressure has pushed it back into yesterday's range. Recall that the US
dollar posted a bearish outside day ahead of the weekend, trading on both sides
of last Thursday's range and settling below Thursday's low. It had reached
a three-day higher before the weekend near MXN18.7975. and fell to about
MXN18.3275 yesterday. Today's low was close to MXN18.30. It is consolidating
and we suspect it may find new bids in North America as the short-term market
positions for Banxico meeting on Thursday after having been surprised by the 50
bp hike last month. The next area of chart support is seen near MXN18.24.
Disclaimer
Reviewed by Marc Chandler
on
March 28, 2023
Rating:
