A powerful short squeeze in nickel saw the price double for the second day before the London Metal Exchange suspended trading. It had allowed traders to defer delivery obligations. However, other key commodity markets were a bit calmer today.
April WTI was in a $3 range on either side of $120. US natural gas was about 3% lower after a 3.6% loss to start the week. European natgas was seeing early gains of more than 11% pared back to around 2.5%. Copper was a little firmer after sliding more than 4% yesterday.Iron ore slipped after rising 5.7% on Monday. Wheat was threatening to snap a six-day 50% rally.
Turning to the capital markets, after a rough start in Asia Pacific, which saw most bourses slump 1%-2%, except India, equities stabilized. Led by strong gains in utilities and financials, Europe's Stoxx 600 was up about 0.4% near midday, as earlier stronger gains were pared. US futures were showing small gains.
Yields recovered yesterday in the US and Europe, and Asia Pacific played catch-up earlier today. Europe's peripheral bonds were outperforming the core markets today. The US 10-year benchmark yield was up about seven basis points to 1.85%.
The Scandis and euro were enjoying modest gains in the foreign exchange market, while the dollar-bloc, which reversed lower yesterday continued to trade heavily. The Japanese yen and Swiss franc were also under modest pressure.
Among the emerging market complex, the central European currencies were enjoying a reprieve from the recent selling, as the market awaited the Polish central bank decision. While most expect a 50 bp hike, the larger than expected Hungarian move last week, and zloty weakness that spurred central bank intervention, warns of asymmetrical risk of a larger hike.
The JP Morgan Emerging Market Currency Index was off about 0.4%, after falling almost 3.5% over the past three sessions.
Asia Pacific
Anecdotal reports seemed to suggest that several large asset managers reduced their exposure to Chinese bonds last month. Bloomberg reported that global funds appeared to have sold CNY35 bln (~$5.5 bln) of Chinese debt last month, which would be a record amount. Since the Russian invasion of Ukraine (Feb. 24), Chinese bonds have performed miserably (30th of 46 sovereign bond markets Bloomberg tracks).
Some suspect that Russian names may have liquidated some Chinese bonds to help buffer the sanctions. Chinese bonds had been touted a safe haven, but the 10-year yield was up about 15 bp since late January. Reports also suggested mainland investors, including domestic funds, brokerages and commercial banks were also sellers.
Japan reported an unexpectedly strong rise in January cash earnings, but a larger than expected deterioration of its current account. Labor cash earnings, which fell by 0.4% year-over-year in December, jumped 0.9% in January. The median forecast in Bloomberg's survey was for a 0.1% gain. It was the largest rise since last May.
Unlike what many workers have been experiencing in Europe and North America, real wages rose in Japan (0.4% year-over-year). It was too early to draw a conclusion about the trajectory. A survey in the Nikkei of more than 6000 companies showed almost a third do not intend to raise wages in the fiscal year beginning Apr. 1. Most planned to grant raises by less than the 3%, Prime Minister Kishida advocated.
Japan's current account balance always (more than 20 years) deteriorates in January from December. The deterioration was more than expected this year as the deficit widened to JPY1.19 trillion from JPY370 bln. Most of the worsening came from the trade balance. The deficit swelled to JPY1.6 trillion from almost JPY319 bln.
In January, Japanese investors bought JPY1.15 trillion (~$10 bln) of euro-denominated bonds, the most in more than a year. They divested JPY15.4 bln of Russian bonds, the most in almost eight years. Japanese investors were also sellers of US and Australian bonds.
The dollar was trading with a firmer bias against the Japanese yen. It reached a three-day high near JPY115.65. Recall it briefly traded below JPY114.80 yesterday. The greenback has not traded above JPY115.80 since mid-February. We suspect that it will cap advances today, barring new developments. Support was seen in the JPY115.20-JPY115.40 area initially.
The Australian dollar staged a stunning reversal yesterday, falling from around $0.7440, its highest level since early last November, to nearly $0.7310. Follow-through selling today pressured it to almost $0.7265 where new bids were found. There were about A$1.2 bln in options struck in the $0.7250-$0.7254 area that expire today.
The dollar opened near CNY6.3160 and briefly dipped below CNY6.31 before snapping back to its opening levels. The PBOC set the dollar's reference rate weaker than expected at CNY6.3185 compared with expectations (Bloomberg survey) for CNY6.3239. Some suggest that the Russian ruble's volatility was making it more difficult to anticipate the fix. There was no onshore price for the ruble exchange rate. Many were relying on offshore indications where spreads were very wide.
Europe
The recent string of German economic data suggested the economy was off to a strong start to the year before Russia's hostilities. Yesterday, Germany reported a slightly stronger than expected 2% rise in January retail sales and a 1.8% rise in factory orders (1.0% expected). Today, Europe's largest-economy reported a 2.7% jump in industrial output, more than five-times the gain expected by the median forecast in Bloomberg's survey. And on top of that the 0.3% fall in December's industrial production was revised away. It rose 1.1%.
US legislation to ban imports of Russian oil and gas was making progress. Europe said it was working on cutting Russian gas imports by 2/3 within a year. Russia was threatening to cut Nord Stream 1 gas deliveries. Separately, JP Morgan indicated it will remove Russian bonds from all of its indices, which were used as benchmarks for asset managers. MSCI and S&P have taken similar actions.
The European Commission was reportedly set to propose a large joint bond issue to finance defense and energy projects. An emergency EU summit (heads of state) will be held on Thursday. This follows last year's initiative that included joint debt to fund a 1.8 trillion euro (~$2 trillion) emergency package. The details were still being worked out, but the prospect seemed to be helping support the euro today and narrowing the spreads between core and peripheral bonds.
The euro was trading within yesterday's range (~$1.0805-$1.0960). It could be the first session in seven that the euro does not take out the previous session's low. Still, there was little enthusiasm or energy on the upside. A move to $1.0920 in late Asia seemed to attract sellers in early European turnover. Initial support was seen around $1.0850. Note that the lower Bollinger® Band was near $1.0880.
Sterling was not as lucky. It fell below $1.31 for the first time since November 2020 in late Asian activity but rebounded in the European morning to around $1.3135. There may be scope for additional near-term gains, but they looked to be limited to the $1.3150-$1.3170 area.
America
Average US gasoline prices were north of $4 a gallon, the highest since 2008. Last week's 10% rise lifted the year-over-year increase to around 50%. Oil imports from Russia accounted for 245 mln barrels last year or around 8% of US imports, which was less than Mexico and Canada, but more than Saudi Arabia. The US imported 198 mln barrels of Russian oil in 2020.
Coinbase (NASDAQ:COIN) announced it froze thousands of Russian crypto accounts. Switzerland said that it too was freezing crypto assets owned by Russian individuals and companies that had been sanctioned by the EU. The Biden administration was expected to outline the government's broad approach to crypto later this week.
Some feared that Russia could use crypto to bypass the sanctions. Meanwhile, note that the US Congress was coming against Friday's deadline for funding the government. However, the failure to do so would likely generate another continuing resolution rather than a government shutdown.
The US reports the January trade deficit. It likely deteriorated by almost 10% to more than $87 bln. Some US imports were likely going to rebuild inventories. Canada reports its January merchandise trade balance and after a small deficit in December, it was expected to have swung back into surplus. Canada had been experiencing a positive terms of trade shock fueled by rising commodity prices.
The US dollar dipped below CAD1.26 in the middle of last week. This was the lowest level for the greenback since late January and looked to be a breakout. However, this year has seen many false breaks, and this was another one. The US dollar reversed higher off that low and rallied about 1.8% through yesterday's high, which was above CAD1.28. Follow-through buying had the greenback near CAD1.2835 in the European morning. Late last month, it spiked to almost CAD1.2880.
The US dollar was getting stretched technically as it toyed with the upper Bollinger Band (~CAD1.2830). Still, there was no compelling sign that it was exhausted. However, look for a top in the next day or two, ahead of the Canadian jobs data at the end of the week.
The Mexican peso remained out of favor. The dollar settled February a little below MXN20.50. It peaked above MXN21.46 today before steadying. The greenback was well above its upper Bollinger Band (~MXN21.17) for the third consecutive session. A firm inflation report tomorrow may boost talk of a 75 bp hike instead of 50 bp when Banxico meets on Mar. 24.