Overview: Russia's
decision to cut gas supplies to Poland and Bulgaria and the sharp sell-off in
US equities yesterday casts a pall over the markets today. But not the
dollar. The euro punched through $1.06 for the first time in five years and the
greenback turned higher against the yen after falling to a seven-day low.
The major bourses in the Asia Pacific region fell by more than 1% except China
and Hong Kong. The Hang Seng eked out a minor gain, but China's CSI
300 rose nearly 3%. Europe's Stoxx 600 gapped lower but has recovered
with the help of materials, consumer discretionary, and energy sectors.
US futures are firm. Treasury yields have recovered part of yesterday’s
decline, putting the 10-year near 2.77% and the 2-year close to 2.58%.
European yields are mostly firmer and the core-periphery spreads are
widening. In the foreign exchange market, the greenback is mixed.
The Antipodeans and Scandis are firm, especially the Australian dollar, after
the higher-than-expected Q1 CPI. The yen, euro, and Swiss franc are
heavy. Emerging market currencies are mostly lower. Of note, the
Philippine peso and the Mexican peso are among the most resilient today.
Hungary, the only EU country that has agreed to pay Russia in roubles, is
among the weakest (~0.9%). That dubious honor goes to the South Korean
won today, off 1.1%, the largest loss since last June and the fifth consecutive
decline. Gold was sold to fresh two-month lows near $1887 before
steadying. June WTI is firm but in a narrow range (~$101.50-$103) near
yesterday's highs. US natgas prices are almost 0.75% higher after gaining nearly 5% over the past two sessions. Europe's benchmark rose about 8.2% yesterday on top of yesterday's nearly 6% gain. It is back to early April
levels. Iron ore rose for a second consecutive session, while copper is trying to end
a three-day fall. July wheat is steady after rising 2% yesterday.
Asia Pacific
Australia's Q1 CPI rose
2.1%, faster than the 1.7% anticipated by the median in Bloomberg's survey and
well above the 1.3% increase in Q4 21. The year-over-year pace accelerated to
5.1% from 3.5%. The underlying measures also rose. The central bank
meets next week, and the market sees the inflation figures as boosting the
chances of a rate hike, which previously was expected after the May 21
election. Yesterday the market had about six basis points of tightening
discounted for the May 3 meeting. Now there are 18 bp increase priced into
the cash rate futures.
The Bank of Japan's two-day
meeting began today. Officials have clearly signaled no intention to change
course. Its defense of the 0.25% cap on the 10-year yield continued to
today but the softer global yields yesterday took some pressure off the JGB
market and there were sellers of 10-year bonds to the BOJ under its fixed-rate
operation. The BOJ is well aware that energy and food prices are lifting
measured inflation and the reduction in wireless charges drop out of the
12-month comparison. It pushes back and says that those developments do
not make the increase in CPI sustainable. Note too that the new economic
package is estimated to shave 0.5% off headline CPI in the May-September
period.
Many observers still seem to
put the cart before the horse. They are concerned that the weaker yen reduces Japanese
demand for Treasuries. The recent price action lends support for the
hypothesis that the causation arrow is running the other way. The
increase in US yields weakens the yen. The US 10-year yield peaked on
April 20. So did the dollar against the yen. They both recorded
eight-day lows earlier today and have recovered. Moreover, the indirect
bids show that the recent US Treasury auctions have been strong, including
yesterday's two-year note sale. That is where foreign participation is
often picked up.
The dollar found a bid after
slipping a little below JPY127. A $540 mln option at JPY126.75 rolls off today. The
greenback has already resurfaced above JPY128. A move above JPY128.25
would lift the tone, but it needs to get above JPY128.50 to sign another attempt
on the JPY129.50-JPY130 area. The Australian dollar recovered from
around $0.7120 to almost $0.7200, but the upside momentum faltered and it fell back
to the $0.7140 area in late Asia Pacific turnover. That said,
the intraday momentum indicators suggest the potential to retest the highs in
North America. The Chinese yuan is trading in its narrowest range
for a little more than a week. The dollar is consolidating its
recent gains and traded roughly between CNY6.5480 and CNY6.5615. The cut
in reserve requirements for foreign currency deposits appears to have succeeded
not in pushing the yuan higher but in steadying the exchange rate. The
PBOC set the dollar's reference rate slightly higher than expected in the
Bloomberg survey (CNY6.5598 vs. CNY6.5596).
Europe
In a bizarre turn of events,
Russia is insisting on being paid roubles for its gas while Europe is insisting to adhering to contracts to pay in hard currency, euros. Russia is making good on its threats and
announced that its cutting off gas supplies to Poland and Bulgaria.
Poland's gas supplies are around three-quarters capacity so the cut of new
supply will not pinch immediately. Bulgaria has indicated it has taken
steps to secure alternative supplies. Russia's actions do raise the
question of who is next and that will likely be seen next month. That
said, Europe's reluctance or inability to move quicker on gas reveals their
vulnerability, which Russia is exploiting. It is quitting Europe before
being fired, in a way. Meanwhile, the tensions are rising in Moldova's
breakaway region. Some argue that Russia ultimately will likely link up
the parts of Ukraine that it appears to be trying to take with the Moldova
region, which would pen-in Ukraine.
Musk's leveraged buyout of
Twitter is spurring a debate about freedom of speech in the US. The constitutional right protects US
citizens from abridgement of that right by Congress not by the private
sector. Clearly newspapers do not have to print all the op-ed submissions
it receives and its not denying the rejected authors their freedom of
speech. In Europe, the reaction is different. Musk is reminded that
Twitter, regardless of its ownership structure, must adhere to the Digital
Services Act, approved last week. It forces the platforms to moderate
illegal and harmful content that their users post.
The 1.4 bln euro option at
$1.06 that expires today appears to have been neutralized. The euro fell to about $1.0585 in
late Asia/early Europe. Initial resistance is seen near $1.0630 and then
$1.0660. On the downside, the 2015-2017 lows were in the $1.0340-$1.0530 area,
but there is increasing talk of a move to parity which has not been seen since
2002. Sterling's losses have also been extended. It fell to
about $1.2535 before recovering to around $1.2590 in the European
morning. The $1.25 area represents the (61.8%) retracement of
sterling's rally off the March 2020 low near $1.14. The next chart point
below there is the June 2020 lows around $1.2250. Over the last five
sessions, sterling has shed more than a nickel. The lower Bollinger
Band is set two standard deviations below its 20-day moving average and
sterling's losses are nearly three standard deviations below the 20-day
average.
America
The US reports mortgage
applications, which have fallen every week since the end of January but one.
March pending home sales are expected to have fallen for the fifth consecutive
month. The March
trade deficit, which remains near a record imbalance, and March (wholesale and
retail) inventories will help economists put their final touches on Q1 GDP
forecasts ahead of tomorrow's report. Due to the revisions in retail
sales reported earlier this week, the Atlanta Fed's GDP tracker fell to
0.4%. It will update it again after today's reports.
As noted, there was a strong
reception at yesterday's US sale of $48 bln two-year notes. Indirect bidders took down 2/3
and direct bidders took another 21.4%. This left the dealers with
slightly more than 12%, the least in almost two decades. On tap today are a
$30 bln two-year floater auction and $49 bln 5-year note sale. Still, the
angst in some corners of the market about the implications of a strong dollar
on foreign demand is unlikely to dissipate.
Bank of Canada Governor
Macklem laid out the logic of raising rates even though it will have little
impact on the prices of internationally traded goods that are understood to be
the main drivers of Canadian inflation. He argued that keeping inflation expectations
anchored will help prices ease when the higher energy and disrupted supply chains
ease.
Mexico reports its March
trade figures. The
balance may have swung into a small deficit after a $1.29 bln surplus in
February. Tomorrow it reports unemployment figures ahead of Friday's
preliminary Q1 GDP. After a flat Q4 21, it is expected to have grown
around 1% in Q2 quarter-over-quarter. Brazil reports April's IPCA
inflation measure today. It is expected to have accelerated to 12.15%
from 10.79% in March. This will further challenge the signals by the central
bank that next month could be the peak in what has been an aggressive tightening
cycle.
The risk-off mood, which
unlike when Russia first invaded Ukraine, is now seen as negative for
commodities and commodity currencies. The Canadian dollar has suffered in this
phase despite constructive macro considerations. The US dollar bottomed
last week near CAD1.2460 and today has approached CAD1.2850. The year's
high was set in early March slightly north of CAD1.29. The greenback has
closed above its upper Bollinger Band for the last three sessions and remains
above it (~CAD1.2810) now. The greenback remains within the range
set on Monday against the Mexican peso (~MXN20.16-MXN20.4850). A
convincing break of MXN20.50 could spur a quick move toward MXN20.60-MXN20.65.
Note the upper Bollinger Band is found today slightly above MXN20.40. The
Brazilian real is a market favorite this year, with high yields, monetary policy
near a peak, and commodity exposure. However, alongside Latam in general and
the setback for metals, market participants have raced to reduce exposure in
both the options and forward markets. The dollar has jumped from around
BRL4.60 a week ago to nearly BRL5.00 yesterday. A move above there today
could target the BRL5.20 area.
Disclaimer
Reviewed by Marc Chandler
on
April 27, 2022
Rating:
