Overview: Surging Covid cases in China and Hong Kong are undermining hopes of a Covid-pivot and the US dollar is broadly higher. Equities are under pressure to start the week. Most of the large bourses in the Asia Pacific but Japan, fell earlier today. Europe’s Stoxx 600 is paring last week’s minor gain, which was the fifth consecutive weekly rise. US stock futures are lower, while the 10-year US Treasury yield is flat near 3.83%. European yields are mostly around two basis points firmer, but Italy’s benchmark is up six basis points, perhaps amid some nervousness ahead of the cabinet vote on the budget in the middle of the week. Sweden is expected to deliver a 75 bp rate hike later this week but it is not offering the krona much support. It is leading losses among the G10 currencies and is off more than 1%. The Canadian dollar and Swiss franc are the best of the bunch and are off almost 0.5%. Emerging market currencies are under pressure, through the Turkish lira, where the central bank is expected to deliver its last cut on Thursday is steady. Gold is trading heavier for the fourth consecutive session and slipped below $1740 to its lowest level since November 10. After falling to $77.25 before the weekend, and settling slightly above $80, December WTI is on the defensive amid demand concerns. US natgas is a little softer after rising 7.2% last week. Europe’s natgas benchmark is 7.5% stronger. It rallied 12.8% last week. China’s Covid concerns pushed iron ore prices down by 3.35%, its biggest loss since late October. December copper is down 1% as its losing streak extends into the sixth session. December wheat is also heavier. It fell in the last three sessions so of last week, too.
Asia Pacific
It seems almost
surrealist. Some
market participants argue that China's zero-Covid policy needs to be abandoned
because it is crimping the economy. The Communists, often depicted as economic
determinists, say not so fast. Still, Bloomberg reports that several large
US-based banks are looking more favorably at Chinese shares, partly on the
supposed Covid pivot. As both domestic and international doctors note, China's
healthcare system is not prepared to cope with a surge in infections that will
"inevitably" follow a genuine reversal of its Covid stance. It is
mainly dealing with a vaccine that is not as effective as the mRNA technology
developed in the west. The vaccination campaign appears to have seen less
take-up, especially among the elderly. One estimate suggests that only 40% of
those 80 and older have had three domestic shots. Hong Kong has been held up as
a model of what China could do, and over the weekend, its hospitals cut
non-emergency services as Covid cases surged. Beijing reported its first Covid
fatalities in six months and has urged the residents in the Chaoyang district
to stay at home today.
While the Covid pivot is not
quite what had previously been hoped, the same is true of the Xi-Biden
handshake. Yes, bilateral
climate talks have resumed, and there will be some high-level discussions, like
the US Secretary of State visiting Beijing. And China did sign of on recent G20
statement that condemned the war in Ukraine. However, the US warned its allies
against deeper ties with Beijing and claimed China recently put longer range
missiles on its submarines. Also, reports indicate that China has stepping up
its energy imports from Russia.
A poll published today from
the broadcast news network ANN showed approval for Japan's government has fallen
to new lows for Prime Minister Kishida of 30.5%, off 2.6 percentage points,
while disapproval rose 3.8 percentage points to 44.7%. A Mainichi newspaper poll yesterday found
43% want Kishida to resign soon. A little less than a third want him to finish
his term, which send in September 2024. The cabinet lost its third minister
within a month. "Funding irregularities" forced the Internal Affairs
Minister to resign and was replaced with the Foreign Minister.
The US dollar is rising
against the Japanese yen for the fourth consecutive day, and the 0.9% advance
through the European morning, if sustained, would be the biggest advance in
three weeks. The
greenback reached a six-day high near JPY141.90. The next target is around
JPY142.15 and then JPY143.20. The intraday momentum indicators are stretched. Initial
support may be found by JPY141.00. The Australian dollar is also under
pressure for the fourth consecutive session near $0.6600, is at its lowest
level in six sessions. The $0.6590 area is the (50%) retracement of the
rally since the November 10 US CPI report, and the next retracement (61.8%) is
closer to $0.6545. The intraday momentum indicators are over-extended. The
$0.6650 may cap upticks for now. The greenback's recovery against the Chinese
yuan began last week when the downside momentum faded near CNY7.0250. It
settled last week slightly below CNY7.12 and reached nearly CNY7.17 today. As
widely expected, the loan prime rates were held steady today. The PBOC set the
dollar's reference rate at CNY7.1256 vs. the median projection (Bloomberg's
survey) at CNY7.1297. Lastly, the US dollar has jumped over 1% against the
South Korean won. Its fourth consecutive advance comes on the heels of a sharp
fall in exports (-16.7% year-over-year) in the first 20 days of November. The
shipments of chips and mobile devices are off by almost 30%.
Europe
Over the weekend, Germany's
largest union, IG Metall struck an agreement with employers in
Baden-Wuerttemberg, which may be the model for an industry-wide settlement. Metal and electric workers received a
5.2% pay increase next year and 3.3% in 2024, and a 3000-euro tax-free bonus in
two lump payments.
Germany's October producer
prices unexpectedly tumbled 4.2% to bring the year-over-year rate to 34.5%. That is the lowest rate since June and the
first monthly decline since May. The decline reflects the sharp reduction in
electricity and gas prices. The price of other energy, such as heating oil, and
food prices rose. As a whole, energy prices fell 10.4% in October and are up
85.6% year-over-year.
Sweden's Riksbank meets Thursday,
and it looks set for another large rate increase. Recall that in September, it delivered a
100 bp increase that lifted the policy rate to 1.75%. Headline CPI was at 10.9%
in last month, and the underlying rate, which uses a fixed interest rate, was
9.3% higher year-over-year.
The euro is trading lower
for its third session and is also at a new six-day low, having approached
$1.0225 in the European morning. The (50%) retracement of the rally since the November 10 US CPI is
closer to $1.0205. The intraday momentum indicators are stretched, and the euro
can recover toward $1.0275. Sterling is holding in better. It
settled at the end of last week around $1.1890 and has fallen almost a cent. Still,
it has not taken out last Thursday's low near $1.1765. A break of it could
signal a move toward $1.1690-$1.1700. A bounce could see $1.1840-50. Lastly,
Israel reported slightly higher than expected October CPI last week (5.1%) and
stronger Q3 GDP (2.1% annualized, while the median forecast in Bloomberg's
survey forecast 1.6%). The central bank meets today and is expected to deliver
its third consecutive 75 bp increase in the base rate, which would lift it to
3.5%. After rising nearly 1.6% against the shekel last week, the dollar is
steady to slightly lower today.
America
A new NY Fed research
paper argues that the shift in bank behavior led to the use of reserve
balances for short-term funding operations, including the intermediation of fx
swaps and Treasury repos. The declining supply of reserves may potentially have implications
for market functioning and financial stability. A higher level of reserves may
be needed. It may also suggest a limit to the unwinding of the Fed's balance
sheet, even if not a resumption of QE next year, as at least one famous Fed
watcher opined early
this year. Perhaps, this may also shed light on why European banks are slower
than expected in repaying the ECB long-term loans (TLTROs). After the terms
were tweaked at the recent ECB meeting, early prepayment has been anticipated. The
slightly less than 300 bln euros that will be prepaid is half the median
projection by Bloomberg's survey. The obvious conclusion is that many banks
find the altered terms still attractive. It gives important information to the
ECB. A significant prepayment was thought to help ease the collateral shortage,
which is seen as spurring a significant gap between swap rates and yields. The
low early prepayment may renew the internal debate about the start of QT, which
has been earmarked to begin after the rate hikes conclude, now seen around
mid-2023. Other major central banks, including the Fed, BOE, BOC, and RBA are
raising rates and shrinking their balance sheets simultaneously.
Atlanta Fed's Bostic opined
that another 75-100 bp of rate hikes may do the job to boost the odds of a
soft-landing. It would
allow policy to be mildly restrictive. On the other hand, Boston Fed's Collin's
who, unlike Bostic votes this year, warned that another 75 bp hike next month
is possible. Many observers are still mulling St. Louis Fed's Bullard's
comments from last week. Bullard showed charts that could justify a terminal
rate between 5% and 7%, but said he was comfortable, for now, at 5.0%-5.25%,
which is more or less what the futures market is discounting. Bullard, Mester,
and George speak tomorrow ahead of Wednesday's FOMC minutes. Today, San
Francisco Fed President Daly speaks (1:00 pm ET).
The US dollar tickled the
CAD1.34 area at the end of last week as it recovered from the CAD1.3225 area
where the downside momentum stalled. Today, it reached CAD1.3440 to meet the (61.8%) retracement of its
losses since that November 10 US CPI. Above there, resistance is seen in the
CAD1.3480-CAD1.3520 area. However, with the intraday momentum stretched but not
confirmed the high in the European morning, look for some consolidation in the
North American session that can see the greenback slip back into the
CAD1.3380-CAD1.3400 band. Meanwhile, the US dollar has been carving out
a bottom against the Mexican peso in the MXN19.25-26 area. It is trying to
establish a foothold above MXN19.50, and we suspect it can test the MXN19.60
area. That said, it has not traded above the 20-day moving average this month. It
is found near MXN19.5850 today. Over the slightly longer-term, we see the risk
of MXN19.80, the floor of its previous trading range. Note that both Canada and
Mexico report retail sales figures tomorrow.
Disclaimer
Reviewed by Marc Chandler
on
November 21, 2022
Rating:
