Overview: Equities in the Asia Pacific region and
Europe are being led lower by the sell-off in the US yesterday. All the large
Asia Pacific markets fell with Hong Kong and mainland shares setting the pace.
Europe's Stoxx 600 is off nearly 1.5%, which would be the largest loss in two
months. Consumer discretionary, financials and real estate sectors are off
nearly 2%. US equity futures have a softer bias. European 10-year yields are
mostly 2-3 bp lower, but the UK inflation shock (1.2% month-over-month and a
new cyclical high in the core rate) has seen 10-year Gilt yields jump around
eight basis points to near 4.25%, the highest since last October.
The greenback is mostly firmer
against the G10 currencies. The Reserve Bank of New Zealand's dovish hike has
seen the Kiwi drop around 1.8% and dragged the Aussie below the $0.6600 area.
The UK's inflation surprise has seen sterling reverse from the $1.2475 area to
push below $1.2400. The euro and yen are straddling unchanged levels. Emerging
market currencies are more mixed. Of note the Hungarian forint is better bid
today after easing on the central bank's rate cut yesterday. Also, the Mexican
peso, which fell to around a three-week low is also better bid today, ahead of
the first half of May CPI today. Gold held support near $1950 yesterday. It
looks poised to test the upper end of its recent range near $1985. July WTI is
extended yesterday's recovery, helped by the Saudi warning against bearish
speculators and an estimated 6 mln barrel draw down of US stocks by API. A move
above $75 would target this month's high near $76.50. Lastly, we note that July
copper is extended its losses and nis now below $360 for the first time since
last November.
Asia Pacific
The Reserve Bank of New
Zealand lifted its cash target rate by 25 bp to 5.50%, but it surprised the
market was signaling its was done. After surprising many with a 50 bp hike in April, the derivatives
market had a greater chance of another half-point move. With consumer prices
rose 6.7% year-over-year in Q1, the swaps market had seen the terminal rate of
5.75%-6.0% toward the end of the year. The central bank now envisions a rate
cut in Q3 2004. With today's move, the RBNZ has lifted the policy rate by 125
bp this year. The currency was punished by the unexpected dovish hike and
roughly doubled this year's loss to about 3.5%.
Japan's weekly portfolio
flow report will be released tomorrow. Last week, foreign investors continued to pour money into Japanese
equities. It was the ninth consecutive week, and over that span it bought what
seems like a record of about JPY6.2 trillion (~$45.6 bln). Last year, they were
sellers at an average weekly pace of about JPY 17 bln (cumulative $6.8 bln) In
2021, foreign investors bought an average of around JPY28 bln a week of
Japanese equities. Typically, the foreign exchange of equity investments is not
hedged or considerably less hedged than fixed income. Foreign investors have
bought an average of JPY45.5 bln of Japanese bonds a week this year. These are
likely hedged back into dollars, euros, and sterling. Last year, foreign
investors were buying at an average pace of JPY207.5 bln. From the other side,
the sale of foreign bonds by Japanese investors was a key element of narratives
about the poor performing bond markets. Last year, Japanese investors sold about
JPY418 bln of foreign bonds a week on average (cumulative JPY21.7 trillion). This
year, they have been buying foreign bonds at an average pace
of almost JPY510 bln a week (cumulative JPY9.6 trillion). With a booming
domestic stock market, Japanese investors do not have much interest in foreign
stocks so much this year. They have been net sellers of around JPY20 bln a week.
Last year, they were buyers at an average pace of JPY68.5 bln.
The dollar is confined to
about a half a yen range below JPY138.75 in quiet turnover. There are ae options for about $320 mln
that expire at JPY139.05 today. We have highlighted the formidable technical
resistance in the JPY139.50-JPY140 area. An important tell is whether the 10-year
US Treasury yield pushes above the 3.75% area, seen yesterday for the first
time since March 10. That said, continued consolidation will not weaken the
greenback's technical tone unless the JPY137.25-50 area yields. The dramatic
sell-off of the New Zealand dollar has pushed the Australian dollar below the
late April low near $0.6575. Thus far, the year's low set in March around
$0.6565 is holding. While the $0.6600 has given way, but the key is the close. And
with intraday momentum indicators stretched, a little recovery can go a long
way to neutralizing the negativity. This requires a close back above $0.6600. The
dollar initially rose to new highs for the year against the Chinese yuan near
CNY6.0675 before reversing lower and slipping through yesterday's low
(~CNY7.04). If the exchange rate was not so closely managed, this
would be a bearish technical development for the dollar. Despite the verbal
warning at the end of last week, the setting of the daily reference rate shows
little concern. The fix today was at CNY7.0560, which was a little above the
projection of CNY7.0549 from the Bloomberg survey.
Europe
The UK CPI fell sharply as a
result of the base effect, but the monthly increase illustrates the underlying
problem. In April 2022,
the UK inflation spiked by 2.5% in the month. This drops out of the 12-month
comparison. It was replaced with a stronger than expected 1.2% increase last
month. On the one hand, this means that the year-over-year rate tumbles from
10.1% to 8.7% (median forecast in Bloomberg's survey was for an 8.2%
year-over-year rate. On the other hand, the 1.2% increase means that UK
inflation has risen at a 7.5% annualized pace through April. By comparison,
through the first four months of the year, the US CPI has risen at an
annualized rate of about 5.2%, while EMU's CPI rose an 6.3% clip. Adding to the
disappointment, UK's core rate unexpectedly rose to 6.8% from 6.2%
year-over-year. This is a new cyclical high and confounds expectations for an
unchanged pace. It was at 6.2% in April 2022.
Germany's DAX is up 16% this
year and set record highs last week. The terms of trade shock have unwound, and Germany's trade
surplus has been restored. However, the current assessment and expectations in
the IFO survey slipped last mon. The former remains in the trough seen at the
end of last year and was in line with expectations at 94.8 (from 95.1), while
the latter snapped a six-month improvement trend to stand at 88.6 (from 91.7).
The overall IFO measure of the business climate also fell for the first time
since last October. It stands at 91.7, down from 93.4.
The euro is trading quietly
in a narrow range (~$1.0768-$1.0795). If it is sustained, it would be the first session in two months,
it has not traded above $1.08. It is continuing to consolidate. Last week's low
near $1.0760 held yesterday. The $1.0735 area corresponds to a (61.8%)
retracement of the euro's gains from the mid-March low (~$1.0515). A move above
the $1.0810-20 area would improve the tone. Sterling slipped slightly
below $1.2375 yesterday to set a new one-month low. It recovered to close
near $1.2415. It reached $1.2470 today in Asia-Pacific turnover but has been
turned back to return to session lows near $1.2380 in Europe. A break of the
$1.2375 brings the $1.2345 retracement objective into view. There are options
for GBP640 mln that expire today at $1.2375 and another set for GBP450 mln at
$1.2350. A final batch for GBP300 mln is struck at $1.2325.
America
The market will receive the
minutes from this month's FOMC meeting at which Chair Powell signaled the
possibility of a pause in June with a little more than a 25% chance of a hike
discounted. In addition,
the year-end effective Fed funds rate is seen near 4.73% up from 4.0% earlier
this month, which still seems aggressive. The FOMC minutes will shed more light
on whether a pause in June was part of the cost of having a unanimous decision
for a hike when some seasoned observers thought there could be a dissent. Is a
pause the default setting for June, or is it as Dallas Fed Logan suggested that
there has not been compelling evidence to top? A "skip", which some
observers have talked about seems difficult to differentiate from the kind of
"conditional pause" of the Bank of Canada. Can Powell & Co deliver
a hawkish hold?
Mexico's central bank paused
it tightening earlier this month and signaled that it intends to keep the
overnight cash target rate high (11.25%) for an extended period of time. Softening of price pressures gave it the
space. Today, Mexico reports CPI for the first half May. The headline rate may
have fallen a little, which would be the second time in a month-and-a-half.
This could see the year-over-year pace slip to 6.17% from 6.27%. It was at
7.86% in the second half of last December. The core rate is seen easing to
7.49% from 7.59% and it has not risen since the second half of January. It was
at 8.34% at the end of 2022.
The US dollar is firm
against the Canadian dollar and is approaching yesterday's high near CAD1.3550.
Last week's high was set
near CAD1.3570, and the trendline, we have been monitoring, drawn off the two
March highs and April's peak is around CAD1.3575 today. A break could spur a
return to this month's high in the CAD1.3630-40 area. Note that there are about
$585 mln of options at CAD1.3600 that expire tomorrow. The greenback
reached a three-week high yesterday against the Mexican peso slightly shy of
MXN18.00. Chart resistance is seen in the MXN18.07-11 area. Still, the
dollar is trading with a heavier bias today. It is poised to snap a six-day
advance, and a close below MXN17.85 could be an early sign that the
short-squeeze is over. The peso's underlying bullish drivers are intact: high
rates, relatively low vol currency, near-shoring/friend-shoring, meme, and
favorable portfolio and direct investment inflows, and strong domestic
institutions (central bank and Supreme Court).
Reviewed by Marc Chandler
on
May 24, 2023
Rating:
