Overview: US equities failed to sustain early gains yesterday, but risk appetites have returned today. Asia Pacific equities had a poor start, with Chinese and Japanese indices losing ground, but the equity benchmarks in Taiwan, Australia, India, and most of the smaller markets traded higher. Taiwan's 1.1% gain is notable as foreign investors continued to be heavy sellers. Europe's Stoxx 600 is snapping a four-day drop with an impressive 3.3% gain, led by the financials, consumer discretionary, and information technology. US futures are trading 1.5-2.0% better. We note that crypto has rallied strongly as well. Benchmark yields are rising. The US 10-year yield is up five basis points to 1.90%. European yields are 2-6 bp higher. China and Australia's 10-year yields reached new highs for the year. The dollar is broadly softer. Of the majors, only the Japanese yen is weaker. The beaten-up Swedish krona is setting the pace with more than a 1% rise. The euro is testing $1.10, a three-day high. Central European currencies are leading the emerging market currencies. Gold peaked yesterday near $2070.50 and is coming off. It is near $2011 near midday in Europe. April WTI is below $122 after reaching $130.50 yesterday. US natural gas is a little softer (10%) in the past two sessions, while the European natgas benchmark is off 15.5% and is lower on the week. Nickel was limitedly up in Shanghai and is not expected to rest this week in London. Iron ore prices eased, while copper is lower for the third consecutive session. May wheat is off around 5.5%.
Asia Pacific
China's February CPI was
steady at 0.9%. The
decline in food prices (3.9%) offset the increase in non-food prices
(2.1%). Pork prices are still a drag (-42.5%). Core prices eased to
1.1%, which is the lowest since last June, from 1.2%. Producer prices
rose 8.8% from a year ago from 9.1%. It matches the slowest pace since
April 2021. On the month, it rose 0.5%, the first increase since last
November.
Three other developments in
China to note. First,
some reports suggest there is movement to allow a new Chinese IPO in the US
later this year. Second, there is talk that Chinese companies could take
an equity stake in some large Russian companies to secure food, energy, and
material supplies. The sharp depreciation of the rouble makes its fire
sale for Chinese companies. Third, the latest American Chamber of
Commerce survey showed little change from the past few years that almost 85% of
US companies do not plan to move operations out of China, even if some tech
companies look to diversify and build duplicate facilities.
Governor Lowe of the Reserve
Bank of Australia acknowledged that a hike later this year is plausible, this seemed to reflect a subtle shift in his position. The market, which had already been pricing in a more
aggressive path than the RBA had signaled took the bait. The market took the implied yield of Australia's cash rate futures 3-5 bp higher. The market
leans toward a hike in June (~75% chance) and has slightly more than 30 bp of
tightening priced in by July.
The dollar is firm against
the yen near JPY115.90. It is the strongest level since February 11, when the US
first warned that Russia was ready to attack Ukraine. It has not settled
above JPY105.80 since February 10. We suspect it can retest the multiyear
high seen twice this year near JPY116.35 in the coming days. The
Australian dollar is finding its bearings after shedding two cents from Monday's
high around $0.7440. It is testing the 200-day moving
average (~$0.7320). The $0.7345-$0.7365 band may hold back stronger gains
today. The greenback reached a nine-day high against the Chinese
yuan by CNY6.3270 but has been sold back down to CNY6.3140. The PBOC
set the dollar's reference rate at CNY6.3178. The market (Bloomberg survey
median) was for CNY6.3166. According to reports, the PBOC has transferred
CNY1 trillion (~$160 bln) to the government. The Chinese central bank,
like other major central banks, give the government some of its profits every
year. Apparently, it is the first time the amount has been
disclosed. Lastly, early exit polls in South Korea are mixed in a
close race between Lee and Yoon.
Europe
Russia has intensified the
bombing of Kyiv. Rouble trading re-opened in Russia for the first time this week, while
the equity market remains closed. Moscow will restrict trade in
unspecified goods and raw materials. The market appears to be pricing in
an imminent default. Meanwhile, a growing number of US consumer
companies, from McDonalds to Coca-Cola and Pepsi, Starbucks, and PayPal are
joining the boycott of Russia.
Poland offered to send more
than two dozen Russian-made fighter planes to a US airbase in Germany to
transfer to Ukraine appears to have been shot down by the US. War planes departing from a NATO
base and flying into Ukraine airspace contested by Russia could spur a clash
between NATO and Russia and is being avoided. The talk of Poland's offer had
circulated earlier this week, but the US seemed taken aback by the formal
offer.
While the EU has waived all
visa requirements for Ukrainian refugees and granted them automatic three-year
stays, the UK has not followed suit. It is requiring paperwork and computer uploads of
documents. This has triggered widespread criticism of Home Secretary
Patel, and some of the fiercest comments have come from within the Tory
Party. Around 760 Ukrainian refugees have been granted visas by the
UK.
Italy was the
exception. Its
January industrial production figures were much worse than expected. The
3.4% decline compared with the median forecast of a 0.5% decline. Recall
that German industrial output rose 2% vs. expectations for a 0.5% gain, and the
December decline was revised to a 1.1% gain. French output was expected
to also have risen by 0.5%, but it rose by 1.6%. Spain's industrial production
fell by 0.1%. The market had forecast a 1.0% gain, but December's 2.6%
contraction was revised to a fall of 0.5%. The year-over-year pace rose
from 3% to 4%.
The euro bottomed near $1.08
on Monday and is testing $1.10 in the European morning. The $1.10 area corresponds to a
(38.2%) retracement of the losses suffered since the Russian invasion
began. The next retracement (50%) is close to $1.1060. What appears
to be a short-covering squeeze is stretching the intraday momentum
indicators. North American dealers may be inclined to sell into the
two-cent bounce. Sterling tested yesterday's low below $1.3090
initially before recovering. It has reached $1.3180 in the European
morning. Monday’s was closer to $1.3260. The intraday momentum
indicators are also stretched and $1.3200 may offer a nearby cap.
America
An argument can be made that
rather than weaken, the global system is stronger today than two weeks
ago. The system is
stronger because the nearly the entire world has come out against the culprits. The
transgressor is being increasingly isolated. Finance, trade, and access
to consumer goods are all being withheld, while not 100%. Surely it is a
more significant blow than anyone reasonably could have expected after the
milquetoast response to the 2008 war with Georgia, the 2014 annexation of
Crimea, and numerous other affronts, include cyber-attacks and the
assassination of Russian citizens. What strengthens the system is when
the norms are enforced. What weakens the system is when the norms are
violated with impunity as when the US invaded Iraq, for example.
Outside of the January JOLTS
report, the economic focus in the US is on the budget bill to avoid a
government shutdown and the Biden administration's crypto strategy. Canada's economic calendar is light.
Mexico reports February CPI figures. The headline rate is expected to
reach near 7.25% from a little more than 7.05% in January. It would be
the fourth consecutive monthly reading above 7%. The core rate is
expected to approach 6.6% from about 6.2% in January. It averaged about
5.6% in Q4 21. A 75 bp rate hike later this month seems increasingly
likely. Brazil reports January industrial production figures. It is
expected to have unwound almost two percentage points of the nearly 3% increase
seen at the end of last year. Brazil's central bank meets next week and
is expected to deliver a 100 bp hike after three 150 bp hikes (October,
December, and January). The swaps market has about 275 bp of tightening
discounted over the next 12 months.
The US dollar rallied from a
little below CAD1.26 last Thursday to a new high for the year yesterday near
CAD1.29. Risk-off
and the widening US two-year premium over Canada (At the end of January, the yields
were almost identical, now the US is at a 20 bp premium. At the end of
last year, it was Canada that offered the 20 bp premium). In any event,
the risk-on mood today has seen the greenback return to the CAD1.28 area. It
had been resistant, and now at first blush support. The CAD1.2780 area
is the (38.2%) retracement objective of the greenback's leg up. The
Mexican peso had been thumped hard since the war broke out but is stabilizing
today. The US dollar rallied a little more than 6% against the peso
since Russian troops invaded Ukraine. It poked above MXN21.4670 yesterday
and is offered around MXN21.2350 in near midday in Europe. Initial
support is seen around MXN21.15, but the MXN20.95-MXN21.00 may offer stronger
support. The Brazilian real has fared considerably better. The US
dollar initially bounced from BRL5.0 to above BRL5.20 but is holding mostly
below BRL5.10 in recent sessions.
Disclaimer
Reviewed by Marc Chandler
on
March 09, 2022
Rating:
