So much information was thrown at financial markets over the last 24 hours, it was quite a challenge to unpick it all and draw conclusions. Sitting here in front of my computer digesting it all left me feeling like I had a solid hour (or two), of "communicating with Mrs. Halley."
The inevitable one-way flow of information left me at once enlightened, and on the other, no clearer than where we started in the first place, but slightly fatigued mentally.
Probably, it is best to break it down into chunks. We will start with China, then Eastern Europe and finally, the FOMC meeting outcome.
China
There were wild scenes in China stock markets yesterday as the government finally acknowledged the scale of the meltdown in Chinese equities and decided to verbally intervene to stop the rot.
Vice-Premier Liu He outlined a number of equity positive measures last night. China would take concrete measures to boost the economy in Q1 via monetary policy and maintaining loan growth. They would accelerate the “rectification” workaround of large China tech platforms—read Alibaba (NYSE:BABA) and Tencent (HK:0700), etc.
On real estate, Vice-Premier Liu said timely and effective risk prevention and mitigation solutions were required and they would put forward supportive measures (read: were going to accelerate sorting out the debt mess).
He also said that progress had been made with US authorities over access to information for dual-listed China companies, reducing the risks of delisting their ADRs by US authorities. He also said they would support and encourage enterprises to list in overseas markets.
The effects were immediate, with tech giants such as Alibaba and Tencent rallying over 30% in Hong Kong and repeating the same feat via their ADRs in New York. Mainland markets finished around 4.0% higher yesterday, and the Hang Seng leapt 9.10% higher, breath-taking. Needless to say, a similar feat was being achieved in trading today.
I have said many times over the past couple of quarters, that trying to bottom pick Chinese equities is like catching a falling knife, mostly because when China’s government says it's going to do something, it does.
Yesterday’s comments were high on headline impact, and light on detail, but it doesn’t matter. When a senior official makes announcements like yesterday's, things have changed. That’s not to say we should all strap on for the ride, the macro environment will be challenging for equities this year.
What we can say, though, is that the Chinese government is drawing a line in the sand on the China equity rout over the medium-longer-term, and we should all respect that. But I have no doubt that a few days of algo and retail investor FOMO exuberance lie ahead.
Ukraine/Russia
Moving to the Ukraine situation, both Russian and Ukrainian officials said that the details of a peace agreement had made strong progress. That was enough for beleaguered European equities to trace out powerful gains, and it also lifted EUR/USD well above 1.1000. While I hope that this is the case, it would all still need to be signed off by President Putin, and the risks there are well known.
To highlight this, France’s foreign minister stated this morning that President Putin is only pretending to negotiate with Ukraine to gain more time. I’m not sure I agree with this. The snow will soon turn to spring mud in Ukraine, increasing logistical difficulties and bogging down tanks while Russia’s treasury bleeds. If China declines to assist Russia, the pressure for a negotiated solution will increase.
Markets have spent the past few sessions building in a Ukraine solution, and the price action in some asset classes overnight even overshadowed the FOMC. The potential for an ugly reversal on a Putin spoof is now very high. It won’t matter in the short-term, but even if a Ukraine solution is agreed upon and enacted, much will be unchanged in the world.
Ukrainian grain will not be planted this year in much of the country, and Russia will be an economic and political pariah. The stagflationary wave will not abate as Russia and much of its exports will remain locked out of international markets. Still, in the short-term, an exuberance similar to China’s equity rally could well continue.
FOMC decision
Finally, the US FOMC has hiked rates by 0.25%. The hike was as expected, and the committee’s dot plot has indicated another 6 hikes taking the Fed Funds to around 2.0% by year’s end. Again, this was as expected, although the dot plot revised the terminal rate for 2023 up to near 3.0%, a huge jump from December’s 1.60%. The FOMC, significantly, indicated a start to tapering the balance sheet will also commence soon, with markets looking for a July start. That is, in effect, a simultaneous twin tightening.
Front end yields rose in response and the 2/10 year curve is very close to being flat. Markets have stubbornly refused to price in entrenched inflation past the next couple of years, and it will be interesting now to see if the whole yield curve moves to inverted, or rachets higher in lockstep, particularly in the 10/30 tenor. The bond market has been too crazy for me of late, so I can only hazard a guess which is option 2 as the US economy continues to perform well, despite inflationary pressures.
The US dollar fell overnight on a buy-the-rumor, sell-the-fact reaction, assisted by easing Ukraine fears reducing haven demand. However, with the Federal Reserve clearly on a hawkish path, and large tracts of Europe and Asia holding monetary policy steady, it is hard to see the US dollar staying on the back foot for long.
Oil and commodity prices have probably seen the best of their retracement now, and if you are a country holding rates steady and a huge energy importer, paid for with US dollars, the greenback is coming for you. I invite readers to view a USD/JPY chart to demonstrate my point.
So overall, my conclusions are that the US dollar will remain resplendent in 2022, even if a settlement is reached over Ukraine. China has drawn a line under local equities, but it doesn’t mean a fixed line in the sand if the rest of the world goes South. Think of it as ibuprofen instead of Panadol. A Ukraine settlement would be welcomed but won’t materially change the underlying macro environment.
The transition from the central-bank derived "buy everything" rally to reality will at times be a painful one. Inflation isn’t going anywhere in a hurry, and baseline effects later this year only hide the damage in economic gobbledygook, not their true impact in real life. Buy the dips in equities for a two-week ride if you wish, but don’t get married to the position in 2022.
2 Late-breaking data points of interest
This morning has seen two interesting data points from the Asia-Pacific. Australian Employment blew expectations out of the water as full-time employment rose by 122,000 jobs, with the Unemployment Rate falling to 4.0%. It will be another nail in the coffin of the RBA’s ultra-dovish monetary outlook and rate hikes should start in H2. The Australian dollar was higher this morning as a result.
Singapore’s Non-Oil Exports (NODX), delivered unhappy news though, rising just 9.50% in February versus 15.70% expected. A notable slowdown in exports to China stands out, reflecting supply chain issues in the City-state, and a weakening China economy. Still, with the announcements made by Vice-Premier Liu yesterday, it was clear that China was moving towards loosening monetary policy and hitting the stimulus button. That should bode well for the future outlook and with the data still in positive territory, the fallout will be limited.
The Bank of England will deliver a 0.25% rate hike later today, in sync with the Federal Reserve. Like the FOMC, the devil will be in the details, most particularly, how hawkish will the outlook be, Ukraine concerns aside. A hawkish BOE should be sterling supportive.
Similarly, Bank of Indonesia will face the same decision today, but like the BOJ that is announcing tomorrow, it will leave policy unchanged, while acknowledging that rate hikes are a possibility. I expect all of Asia to follow the same path, and it is the main reason why I believe Asian currencies face a sustained period of weakness in 2022.
Asian equities rally sharply
Equity markets ignored the warning signs from the bond market post-FOMC overnight, piling back into long positions after the FOMC held no surprises in its mind. Assisting things along were positive signals around Ukrainian talks and the huge rally in China stocks that also lifted their ADRs to huge gains in New York. For now, China's stimulus hopes and backstopping the stock market, and hopes, however tenuous, of a Ukraine settlement, are trumping anything the Fed does. It is very much in line with a stock market that has been programmed to buy dips for the last 14 years, thanks to central bank quantitative easing.
Overnight, the S&P 500 rallied by 2.26%, the NASDAQ leapt 3.80% higher, while the Dow Jones gained 1.55% as the growth/value trade also did its work. In Asia, futures on all three edged slightly lower on long-covering by fast money.
Chinese markets received a massive boost from the government yesterday, and that afterglow and a positive New York session propelled regional markets higher once again. Japan shrugged off a Fukushima earthquake, the Nikkei 225 jumping by 3.40%. South Korea’s KOSPI was 1.75% higher.
China markets were on fire, the Shanghai Composite rallying by 2.60%, and the CSI 300 climbing an impressive 3.20% higher. Both indexes fully unwound their losses for the week. After a huge day yesterday, the FOMO gnome’s appetite was undiminished in Hong Kong, as the Hang Seng rocketed 6.15% higher today as the street priced in the end of the China tech rout.
Across regional markets, Singapore was up 1.0%, Taipei by a mighty 2.90%, Kuala Lumpur by 1.05%, and Jakarta was unchanged ahead of the Bank Indonesia rate decision. Manilla rose 1.20%, and Bangkok by 0.95%. A similar story was playing out in Australia, boosted by impressive employment data. The All Ordinaries climbed 1.15% higher, and the ASX 200 by 1.10%.
European markets enjoyed a banner day yesterday, as markets there continued to aggressively price in a Ukraine peace agreement. The warnings from the French Foreign Minister will likely be ignored today as markets are good at being tone-deaf to news that doesn’t suit the narrative. That same theme will likely continue into New York.
If a Ukraine agreement acceptable to both Presidents does emerge, I acknowledge that much higher short term gains are possible before the cold reality of a stagflationary world returns to pour cold water on them.
US dollar bashed by Ukraine hopes
In behavior reminiscent of equity markets overnight, the US dollar staged a full retreat as stimulus hopes out of China, and an apparent Ukraine agreement inching closer to reality saw a mass exodus out of haven positioning and into full risk-seeking mode. The dollar index fell 0.62% to 98.40 where it remained this morning. This region was also technical support, and a sustained break lower will signal a deeper correction towards 97.50.
EUR/USD rallied powerfully for much the same reasons, climbing 0.75% to 1.1035, while GBP/USD rose 0.80% to 1.3160. A hawkish BOE today could extend sterling gains above 1.3200, and if more progress is made on a Ukraine agreement, EUR/USD could well be on its way to 1.1200. I believe the single currency will struggle to maintain its gains above that level, though, as post-Ukraine, the inflation shock will continue to persist and the divergence with US monetary policy will eventually stop any structural rally.
USD/JPY continued to trade around 118.75 as markets priced in a soaring energy import bill, and a widening US/Japan rate differential. With the BOJ expected to remain as dovish as they have been for the last 25 years tomorrow, upside pressure on USD/JPY should resume. AUD/USD rallied 1.35% overnight to 0.7290, rising to 0.7310 in Asia after strong labor market data.
NZD/USD was 1.0% higher to 0.6835 over the past 24 hours. Both antipodeans have surfed the resurgent wave in optimism from China and Ukraine higher. The rallies only leave them in the middle of their March ranges though. Although further sentient gains were possible, both were acutely vulnerable to negative headlines hitting the news tickers as well.
China was back adding countercyclical factors today, setting a much higher than expected PBOC USD/CNY fixing at 6.3406, while also adding cash via the repo. That stopped the overnight sentiment rally by CNY and CNH in its tracks and was also going to limit gains in the Asian FX space in general.
The Korean won, Indian rupee, Thai baht, Singapore dollar, and Malaysian ringgit rallied sharply overnight and booked more gains today, riding China euphoria. As massive net importers of energy, and with little or no willingness to materially tighter monetary policy, all will struggle to maintain material gains, especially if China was guiding the yuan lower. The rally could continue for a few sessions yet, but I expected Asian currencies especially, to face serious challenges this year.
Asia, once again, buys the oil dip
Oil prices held steady overnight, led by the perception of diminishing Ukraine risks and a positive meeting between the leaders of Saudi Arabia and the United Kingdom. The platitudes handed out to Boris Johnson in Riyadh conveniently overlooked the fact that the Saudis were committed to OPEC+ and were not able to unilaterally boost production within that framework. But why let reality get in the way of a good story? A much higher US crude inventory print also helped cap intraday gains.
Brent crude finished 0.75% lower at $97.95 overnight, while WTI was unchanged at $95.00 a barrel. In Asia, sub-$100 prices were irresistible once again, especially after Chinese indications that stimulus and economic support were on the way. Brent crude has risen 1.90% to $99.80 a barrel in Asia, with WTI adding 1.80% to $96.70.
While Asia, as huge net energy importers, continued to slurp up sub $100 oil, European and US markets have been more circumspect. Oil remained vulnerable to another spike lower on positive Ukraine developments. Key support was at $96.00 for Brent crude and the $91.50 region for WTI.
A concrete agreement emerging acceptable to both presidents will see both break lower, and I can see another $10 drop thereafter for both. But an agreement will do nothing to restore Russian oil to global markets, nor will it encourage OPEC+ to pump more. After the euphoria dies down, I expect reality to reassert itself. Similarly, any negative developments will send oil sharply back above $100.00 a barrel and if anything, the prospect of a China stimulus will increase upside demand.
Gold rises modestly overnight
Gold tested $1900.00 overnight but shrugged off the FOMC rate hike and hawkish outlook, finishing the session 0.50% higher at $1927.50 an ounce, rising another 0.40% to $1935.00 in Asia. The sharp fall in the US dollar was the major reason for the gold rally, aided by an asinine reaction by US {{23706|long-dated yields} to the FOMC decision and outlook.
Looking at the price action overnight, I believe we were finally seeing some support coming back into the gold market after it was badly burnt on the rally through $2000.00. Just how concrete that support is, however, remained to be seen. I will be a lot more comfortable signaling a base in prices if gold can hold onto its gains if the US dollar rallies. Otherwise, the risk remained that this was a sucker’s rally.
Gold had resistance into $1960.00 an ounce, its previous capitulation point. Support lay at $1900.00 and then $1880.00 an ounce. A sustained failure of the latter signals gold’s torment continues and that $1800.00 an ounce beckons.