Overview: The dollar is mostly lower, led by the Swiss
franc and euro. However, despite softer US rates and a victory for the LDP in
local Japanese elections, the yen is trading with a softer bias. Japanese
stocks recovered from the pre-weekend profit-taking seen after the Nikkei make
new highs for the year. Most other large bourses in the region except Taiwan
and India also moved lower. Note that China's CSI 300 fell for the fourth
consecutive session and the first back-to-back loss of more than 1% of the year.
Europe's Stoxx 600 is flat. It rose last week for fifth consecutive weekly
advance. US futures are trading with a lower bias.
European benchmark yields are slightly softer, while the US 10-year Treasury
yield is off a little more than 3 bp to slip below 3.54%. European two-year
yields are mostly 1-2 bp higher, while two-year US Treasury yield is off 3 bp
to 4.15%. Recall that last week, the US 2-year yield reached 4.28%, the highest
level since mid-March. Gold is little changed around $1984. It peaked near
$2049 on April 13 and tested support in the $1970 area last week. June WTI
initially extended last week's 5.5% drop that snapped a four-week rally. It
recorded a low today of almost $76.70. The high before OPEC+ output cut
announcement at the start of April was near $75.85, which is the bottom of the
gap. A move above $78.40 lifts the technical tone.
Asia Pacific
The Liberal Democratic Party won four of the five parliament seats that
were up for grabs yesterday. Prime Minister Kishida support has risen
recently, arguably helped by three initiatives--increased defense spending,
child support, and especially the subsidies for gas, electricity, and travel.
Japanese voters also appear to appreciate Kishida's presence on the
international stage. Yesterday's election results will further encourage
Kishida on the path he seems to want to go down: snap elections. He will host
the G7 summit (May 19-21) is his hometown Hiroshima, which will also show
Kishida as a statesman. A June-July election is possible, but the risk is that
it is also around the same time that the Bank of Japan is expected to change
monetary policy in a less accommodative direction. Kishida also may want to be
in a good position ahead of the LDP leadership contest in September 2024.
China's ambassador to France has sparked a row that could very well
jeopardize President Macron's hope that Beijing would act as a mediator of a
negotiated settlement between Ukraine and Russia. The ambassador opined
ex-Soviet Union republics "don't have effective status under international
law." This includes Crimea, and, paradoxically, the Baltics, which Beijing
recognized more than 30 years ago. Apparently, official Chinese websites have
deleted the ambassador's comments. Separately, reports suggest that Italy may
withdraw from the Belt Road Initiative. It is the only G7 country that joined
it (2019). Italy's Prime Minister Meloni has been fiercely pro-NATO and
Ukraine, even though her coalition partners are considerably less so. Also,
Taiwan is considering investing $400 mln in Italy's chip sector. A formal
decision is seen likely ahead of next month's G7 summit. Meanwhile, on a
different front, earlier this month, Beijing began a national security review
of Micron, a key producer of Dram memory chips. China and Hong Kong accounted
for a quarter of Micron's revenue last year. The US reportedly requested that
South Korea's companies do not make up the difference if Micron is sanctioned. President
Biden is hosting South Korea's President Yoon Suk-yeol's state visit
today.
The US dollar is trading in narrow range and held below the pre-weekend
high of almost JPY134.50. Although it was frayed last week on an
intrasession basis, JPY135 still offers resistance and there is a large option
($1.1 bln) expiring later in the week. Support is seen near JPY133.80 and then
JPY133.50. The Australian dollar was sold to an eight-day low near
$0.6665 late in the Asia Pacific sessions before recovering to almost $0.6700
in the European morning. The $0.6700-20 offers the nearby cap. Still, it is
in the middle of the $0.6600-$0.6800 range that has dominated since mid-March. A
breakout does not appear imminent. The greenback traded to nearly
CNY6.9065, a new high for the month. It was not able to sustain the
upticks and retreated below CNY6.8950. There are options expiring today for
around $625 mln at CNY6.8960. The dollar's reference rate was set at CNY6.8835
(vs. the median projection in Bloomberg's survey for CNY6.8843).
Europe
S&P boosted its outlook for the UK and Greece, while affirming its
outlook for Italy. The rating agency had cut the UK's credit outlook to
negative last year amid the turmoil of Prime Minister Truss's few days in
office. Her successor, Sunak, has overseen the reversal of most of the unfunded
stimulus and S&P rewarded it by returning the outlook to stable of its
AA-rating. S&P concurs with the Bank of England's forecast of a 0.5%
contraction this year. The IMF's new forecasts envisions a 0.3% contraction and
the median projection in Bloomberg's survey sees a 0.2% decline in GDP this
year. S&P now gives Greece's credit a positive outlook while maintaining a
below investment-grade rating of BB+, the same as Fitch, which has a stable
outlook. Moody's gives Greece a Ba3 rating (BB-) with a positive outlook. S&P
cited the structural reforms, the stronger fiscal position, and the resolution
of the lion's share of the bad loans. Greece recorded a primary budget surplus
(excludes debt servicing costs) last year after two years of deficits. Tourism
has nearly returned to pre-Covid levels. Greece's debt stood at 206% of GDP in
2020 and was a little more than 170% last year. S&P projects it to fall to
135% in 2026. Parliamentary elections will be held next month (May 21). S&P
affirmed Italy's BBB rating and maintained its stable outlook. Fitch concurs,
but Moody's sees Italy as a BBB- credit (Baa3). S&P expects a small primary
budget surplus next year and debt to fall to 136% of GDP in 2026 from 144% in
2022.
Despite S&P's move, the UK Prime Minister Sunak was dealt a political
blow ahead of the weekend. The third cabinet official in around six months
has left. An independent investigation into Sunak's ally and Deputy Prime
Minister Raab concluded that he was abrasive, aggressive and intimidating to
the civil service. Raab resigned and was replaced by his deputy Dowden, who
also runs the Cabinet Office. Chalk will assume Raab's other role as justice
secretary. Although some national polls suggest the gap between the Tories and
Labour has narrowed a bit recently, it is still double-digit, and the Tories
appear headed for a shellacking in the local elections next month (May 4, while
Northern Ireland elections are May 18). Most of the seats that are being
contested last faced election in 2019, when the Tories lost more than 1000
council seats and several councils with the Lib Dems made the most gains. Tory
officials acknowledge that the party may lose another 1000 council seats in
upcoming election.
The euro turned better bid in early European turnover and pushed back
above $1.10 for the first time in six sessions. It appeared to have been
helped by the IFO survey that showed German expectations improved (92.2 vs.
91.0) even as the current assessment soften a little (95.0 vs. 95.4), allowing
the overall measure of the business climate to tick up (93.6 vs 93.2). The move
above $1.10 like spurred some option related buying. There are options for
almost 755 mln euros struck at $1.10 that expire today. The intraday momentum
indicators are stretched. The high for the year was set on April 14 near
$1.1075. Sterling is firm, but so far is holding below last week's high
(~$1.2475). That area also corresponds to the (61.8%) retracement of the
losses since the April 14 high (~$1.2545). Here, too, the intrasession momentum
indicators are stretched. Initial support is seen around $1.2440.
America
The key question remains: how much of the Fed's work is being done by the
tightening of lending? Initially, economists, rushed to judgment in our view,
claiming it was worth 50-75 bp. Prior to the stress, the futures market had a
nearly 5.75% terminal rate discount. Now, the derivatives market is saying that
next month's move to 5.25% is the final move. Yet, the risk of another hike
seems underpriced. Emergency borrowing from the Federal Reserve rose in the
past week for the first time in five weeks. The roughly $4 bln increase (to
almost $145 bln) was nearly equally divided between the discount window and the
new Bank Term Funding Program. However, commercial, and industrial loans rose
for the second consecutive week (through April 12). Over the two weeks, such
lending rose by slightly more than $15 bln. The previous two weeks saw a
record-decline of $68 bln.
The KBW bank index fell by a quarter last month. It has stopped
falling but has not recovered much (~1% so far here in April). Deposits fell by
$76.2 bln as the hemorrhaging continues, mainly from the large US and foreign
banks. However, this seems like the financial equivalent of some other businesses
raising prices beyond passing along rising input costs. In their recent reports
JP Morgan showed a 49% rise in net interest income (the difference between its
cost of funds and what it can charge), Wells Fargo reported a 45% increase,
while Citi recorded a 23% increase. Meanwhile, ahead of the weekend, Moody's
downgraded 11 regional banks, and most of whom had been discussed since last
month's failures at Silicon Valley Bank and Signature. It said that challenges
to managing assets and liabilities are pressuring profitability.
The quiet period ahead of next week's FOMC meeting has begun. The
Dallas manufacturing survey will be reported today, and the retail sales and
inventory figures will be revised. Note that around 180 of the S&P 500
companies report earnings this week, accounting for more than $10 trillion in
earnings. Earnings are expected to decline for the second consecutive quarter. Mexico
reports CPI figures for the first half of April. Although price pressures are
easing, Banxico is expected to follow the Fed and hike rates next month.
The US dollar extended its recovery against the Canadian dollar to almost
CAD1.3570 before reversing lower. That is a new high for the month.
Recall that on April 14, the greenback traded near CAD1.3300. The CAD1.3580
area is the (50%) retracement of the US dollar's decline from the March 10 high
(~CAD1.3570). The five-day moving average is nicking the 20-day moving average
for the first time since last March. Support is seen around CAD1.3480. Note that
options in the CAD1.3565-75 (~$900 mln) expire later this week. The US
dollar continued to trade within the range set last Monday
(~MXN17.9315-MXN18.1540). The greenback is firm but looks capped near
MXN18.05. Support is seen by MXN17.98.
Disclaimer
Reviewed by Marc Chandler
on
April 24, 2023
Rating:
