Overview: The large bourses in the Asia Pacific fell today after sharp losses in the US yesterday. China and Hong Kong were exception, posting more than 1% gains. The mainland markets closed higher on the week. Europe’s Stoxx 600 made a new low for the year before recovering. It is up a little more than 1% around midday. US futures are around 0.75% higher. The US 10-year yield is firm near 3.20%, while the rally in European bonds and narrowing peripheral-core spreads continues. Italian, Spanish, and Portuguese benchmark yields are 18-20 bp lower, while German, French, and Dutch yields are 7-9 bp lower. The greenback is trading with a firmer bias, with the yen being tagged for around 2% after the BOJ showed no intention of addressing the yawning divergence of monetary policy. The Norwegian krone and Swiss franc are the most resilient. Among emerging market currencies, the freely accessible ones are the most resilient today, including the South African rand, the Polish zloty, and the Mexican peso. Gold has risen by almost $50 an ounce over the past two sessions but has come back offered today and is hovering around $1850. July WTI continues to recover from its 4.4% slide in the first few sessions this week. It gained almost 2% yesterday and is up another 1% today and is near $119. US natgas is edging higher and is near $7.50 having finished last week near $8.85. Europe’s benchmark has surged 55% this week as US and Russian supplies have been disrupted. Iron ore extended its sell-off for the seventh consecutive session. It is off about 18% in this run. Copper is faring a bit better, but it has fallen in five of the past six sessions coming into today and is off another 0.5% today. It has fallen a little more than 8% during this downdraft. July wheat rose 2.7% yesterday and is little changed so far today.
Asia Pacific
The Bank of Japan stood pat,
recommitted to its yield-curve control and daily bond purchases, driving the
yen sharply lower. Governor
Kuroda appeared to have made one seemingly minor concession. The BOJ's
statement included a reference to the markets, saying that the impact on
foreign exchange market and financial markets would be watched. This did not
deter market participants from selling off the yen as the divergence of
monetary policy is maintained. The dollar recovered from yesterday's low around
JPY131.50 to almost JPY134.65. In this context, intervention, which has not
seemed particularly likely seems even more remote now. A statement from the G7
(June 26-28) may not deviate from the boilerplate references that foreign
exchange rates are best set by the markets, but excessive volatility is
undesirable.
The combination of a larger
than expected RBA rate hike last week, a bigger than expected rise in the minimum
wage, and hawkish comments from central bank Governor Lowe has sparked a
dramatic adjustment in Australian rate expectations. The implied year-end rate of about 3.85%,
is up 70 bp this week after the 80 bp rise last week. The 10-year yield has
risen for the third consecutive week for a cumulative increase of almost 90 bp
to above 4.10%.
The dollar peaked on
Wednesday at a 22-year high around JPY135.60 before reversing lower. It posted a key reversal by making new
highs for the move and then settling below the previous session's low. There
was follow-through dollar selling yesterday to JPY131.50. In the aftermath of
the BOJ meeting, the dollar has jumped back and approached yesterday's high
that was just shy of JPY134.70. There is an option for almost $700 mln at
JPY135 that expires today. The greenback was around JPY134.40 at the end of
last week. The two-day rally that lifted the Australian dollar about 2.5%
stalled near $0.7070 yesterday. It is straddling the $0.7000 level in late
morning dealings in Europe. At $0.6960, it would have given up half of the
gains since the June 14 low (~$0.6850). The option for almost A$500 mln at
$0.7000 that expires today appears to have been neutralized. The Aussie settled
last week near $0.7060. The greenback traded quietly against the Chinese
yuan and was confined to the smallest range of the week, trading between
roughly CNY6.6915 and CNY6.7060. The PBOC set the dollar's reference rate
at CNY6.6923, a little lower than the median in the Bloomberg survey of
CNY6.6944. The fixings have alternated this week between a stronger and weaker
than projected yuan. The dollar is a little lower on the week, having closed
near CNY6.7090 last week.
Europe
The Bank of England hiked
the base rate by 25 bp. It
warned that rather than expand by 0.1% this quarter, the economy was likely to
contract by 0.3%, and inflation would peak closer to 11% than 10% as it
suggested previously. Three members dissented in favor of a 50 bp increase. The
statement said the central bank is prepared to act more forcefully if necessary. The
year-end rate implied in the swaps market jumped 16 bp to 3.0% yesterday and is
edging a little higher today. It is pricing in about 185 bp of hikes in the
four remaining meetings of the year. That is more than a 50 bp hike that are fully
discounted for the next three meetings, plus a little more.
The ECB built market
expectations earlier this week when it needlessly announced an emergency
meeting to discuss the market. Nothing new came of it but instructions for others to have another
meeting and devise a tool that can be used to fight the divergence of interest rates,
which ECB President Lagarde says can interfere with its price stability mandate.
Lagarde appears to have briefed the eurozone finance ministers that the ECB
intends to put limits on bond spreads. Details are still lacking, but ostensibly
the purpose is to curb sharp moves in short-time periods, and address what
Lagarde called "irrational" moves. The tool sounds a lot like the
Outright Market Transactions, which focused on the short end of the coupon
curve, the purchases were to be neutralized, ostensibly by the sales of another
asset, and required the beneficiary country to request it. Conditions were to
be attached. If it is the ECB's tool and it is used under it discretion, won't
that dilute conditionality? Selling German Bunds might make sense if the
ECB thought that a shortage of them was an important factor driving the spread.
However, determining what is an irrational move can be an expensive exercise.
The euro traded a little
above $1.06 yesterday, its best level of the week amid what appeared to be a short
squeeze. Earlier in the
session it traded below $1.04. The narrowing of intra-EMU bond spreads seemed
to encourage the move. The US 2-year premium over Germany fell from 213 bp to
194 bp yesterday, its least in four months. The euro is consolidating today
after advancing for the past three sessions, the longest advance this month. It
briefly traded below $1.05 in late Asian turnover, where options for 1.2 bln
euros expire today. It settled last week near $1.0520. Sterling rallied by
nearly 3% over the past two sessions, its biggest two-day rally this
year. It poked above $1.24 yesterday but was unable to sustain the
strong upside momentum. Sterling has been capped today around $1.2365 as a
consolidative tone is seen ahead of the weekend. Initial support is seen around
$1.2250, and a break could spur another half cent decline. Sterling settled
near $1.2315 last week.
America
Although Fed Chair Powell
pushed back against any suggestion that the economy is fragile, the latest
string of May and June data have disappointed. It actually began with the June Empire
State manufacturing survey (-1.2 vs. 2.3 median forecast in Bloomberg survey),
and carried through May retail sales, and yesterday's news of a 14.4% drop
in housing starts (which partly was blunted by a revision to the April series
to 5.5% from -0.2%). The Philadelphia June survey unexpectedly fell to -3.3
from 2.6. The six-month outlook for orders, ostensibly a lead indicator, fell
sharply to levels associated with economic contractions. Weekly initial jobless
claims were a little higher than expected and have averaged 230k over the last
couple of weeks, the most in five months.
On tap today are the May industrial
production and Leading Indicators Index. Industrial output likely slowed after the heady 1.1% gain
in April. Economists expect a modest gain (0.4%) with manufacturing output
growth slowing to 0.3% (from 0.8%). The manufacturing sector added 18k jobs in
May, according to the recent employment report, the least since April 2021. Given
the recent track record of not appreciating the economic softness, the risk is
on the downside. The components of the LEI are largely known, and the index is
expected to have fallen for the second consecutive month for the first time
since Covid struck. Powell makes opening remarks at a conference between the
equity market today, and Governor Waller discusses monetary policy tomorrow at
a Dallas Fed gathering.
Canada reports May
industrial prices and April securities transactions, neither are typical
drivers of the Canadian dollar. The swaps market is strongly leaning toward a 75 bp hike at the
July 13 Bank of Canada meeting. Several Canadian banks have switched and now
look for a 75 bp move. The market has 200 bp of tightening priced in the next
four meetings. It looks like a 75 bp move, two 50 bp moves and a 25 bp in
December. However, the broader risk appetite seems more important for the
day-to-day movements. Since it almost reached CAD1.30 in the middle of the week,
the US dollar has consolidated. The Canadian dollar did not take part in
yesterday's wider move against the greenback. A break above CAD1.30 targets
last month's high near CAD1.3075. Important support has developed around
CAD1.2860. The Canadian dollar is one of the weakest of the major currencies this
week, falling about 1.5% against the US dollar. So far today, the dollar
trading between MXN20.30 and MXN20.50. It settled near MXN19.96 last week.
Mexico's central bank meets on June 23. A 75 bp hike is expected after four 50
bp hikes and the Fed's large move. A 100 bp hike seems more likely than a 50 bp
move.
Disclaimer
Reviewed by Marc Chandler
on
June 17, 2022
Rating:
