Challenging Monday

Investors are having a tough time of things today.  There are three issues that have eclipsed the firming of expectations for  a mid-year Fed hike.  Greece's Tsipras remained committed to his campaign promises in a speech to parliament which keeps in on loggerheads with the Europe.  

The confrontation with Russia over Ukraine is at crossroads.  If a deal is not worked out later the week, the may be serious escalation as some in the US, over European objections, send weapons to Ukraine.   Both these issues will likely be discussed today when Obama and Merkel meet.  A press conference is expected a little before midday on the East Coast. 

The third issue is China's trade balance.  The surplus ballooned to $60 bln, a 20% surge from December.  However, the critical point is that this surge was a function of a decline in both imports and exports.  Imports slumped by almost 1/5 on a year-over-year basis (-19.9%).  The key driver here is the sharp decline in commodity prices, especially oil, iron order and coal.  Domestic demand may have also softened leading to some volume reductions on top of the value decline. 

Exports fell 3.2% year-over-year.  This is partly a function of weak foreign demand.  Some may see the nearly 11% decline in exports to Hong Kong as a result of the official crack down on fraudulent activity.  The 42% decline in exports to Russia is notable.   Could there be a currency component here?  The Australian dollar gapped lower in Asia partly in response to the Chinese import news.  However, is recovered in the European morning. 

In some ways, China's trade figures reflect a positive terms of trade shock.  Japan is also benefiting from the drop in commodity prices.  It reported its sixth consecutive monthly current account surplus.  The surplus of JPY187.2 bln was about half of the consensus, but on a seasonally adjusted basis is was better than expected.  The trade balance component was still in deficit, but at JPY395.6 bln, it was about 20% smaller than expected.  Japan's exports rose 19% year-over-year, while imports were up 6.7%. 

Germany almost reported a larger than expected trade surplus.  The 19.1 bln euro surplus in December was about 20% more than the market expected, which had anticipated a 16 bln surplus after 17.9 bln in November.  Exports were stronger than expected and imports weaker.  Exports fully recovered from the 2.2% decline in November (initially -2.1%), posting a 3.4% increase.  The market had expected a 1.0% increase.   In this context, we notes that the EMU Sentix reading rose to 12.4 in February from 0.9 in January.  This is consistent with the recent string of data that generally points to a modest strengthening of the eurozone economy. 

If the increase in exports says something about foreign demand, than the decline in imports may say something about domestic demand.  It also says something about the relative price change and the fall in commodities, which is picked up in falling wholesale and producer prices. 

The three challenges (Greece, Ukraine and falling Chinese and German imports) is lifting core bonds and weighing on equities.  Led by Greece, periphery bond yields are higher.  US 10-year bonds yields have pushed back from 1.95% at the end of last week and are down 6 bp now. The 10-year gilt yield is off as much, while German and French 10-year yields are 3-4 bp lower.   While the MSCI Asia-Pacific Index was off slightly, the Dow Jones Stoxx 600 is off nearly one percent in Europe, lead by utilities and financials and consumer discretionary sectors.  

 The euro initially fell to nearly $1.1285 on the weekend developments.  However, buying by Asian corporates and European real money reportedly helped lift the euro back to almost $1.1360 in the European morning.  That general area is seen as resistance.  Important support is seen near $1.1265.   A break of that range will be important. 

Sterling was turned back from the $1.5260-70 area as it was since the US employment figures.  It has tested the $1.5200 support area in late London morning turnover.  A break opens the door for $1.5150, but short-term participants may be reluctant to extend shorts ahead of the BOE's inflation report. 

The easing of core bond yields and the weakness in the European and US equities have seen the dollar drift lower against the yen.  The JPY119 level, which the dollar had closed above before the weekend could not be sustained.  It has tested the JPY118.50 area.  A break signals JPY117.50-JPY118.00. 

The dollar-bloc is doing better, with New Zealand leading the charge.  These upticks are corrective in nature and we expect that they will be sold into.