Most Asia Pacific equity markets moved lower after US losses yesterday and Tencent's (HK:0700) earnings miss today. Chinese and Hong Kong markets led the regional decline that spared only Japan and Australia among the larger markets.
Better than expected flash PMI reading is helping the Stoxx 600 stabilize after yesterday's 1% drop. US futures were recouping around half of yesterday's losses. Bond markets remained under pressures. The 10-year Treasury yield was up around nine basis points to 2.38%. European yields were 5-7 bp higher.
The Scandis were proving most resilient to the stronger US dollar today. The Norwegian krone, helped by a 25 bp rate hike, was the strongest of the majors. As expected, the Swiss National Bank remained on hold. The Swiss franc, Japanese yen and the Antipodeans were the weakest of the majors with around a 0.25%-0.45% loss in late morning turnover in Europe.
Among the emerging market currencies, which were mostly lower against the dollar, the Mexican peso edged higher. Banixco was expected to hike rates by 50 bp later today. The Philippine peso, where the central bank stood pat, also firmed.
Turning to commodities, gold approached the upper end of its recent range near $1950. A break of it could spur a move toward $1962. May WTI was steady. The move above $113.35 targets the $118 area ahead of the $126 high set earlier this month. US natgas was softer for the third sessions, while Europe's benchmark extended the two-day, ~16% advance by another 8% today. Iron ore firmed and copper was testing the (61.8%) retracement target the pullback since Mar. 7 near $480. May wheat was softer for the third session.
Asia Pacific
Japan's preliminary March PMI suggested the world's third largest economy began stabilizing while COVID and natural disasters disrupted Q1 growth. The manufacturing PMI rose to 53.2 from 52.7. It finished last year at 54.3. The contraction in services eased to 48.7 from 44.2. This was the best reading in the first three months of the year. The composite reading recovered to 49.3 after falling in February to 45.8 from January's 49.9.
Australia's flash March PMI showed the economic momentum strengthened. The manufacturing PMI rose to 57.3 from 57.0 and the services PMI improved to 57.9 from 57.4. This saw the composite PMI increase to 57.1 from 56.6. It was the strongest since last May. The futures market brought forward the anticipated first hike by the Reserve Bank of Australia to June from July.
The dollar's run against the yen continued. With today's advance, it rose 13 of the past 14 sessions. It began the move after closing around JPY114.80 on Mar. 4. It reached JPY121.75 today, where the upper Bollinger® Band was found. With rising US yields and no official pushback, the upside still beckoned. There was little chart resistance until closer to JPY123.50.
The Australian dollar was struggling near $0.7500 and was unable to extended yesterday's gain. It too flirted with the upper Bollinger Band. Yesterday's low around $0.7450 may offer initial support.
The greenback made a new seven-day high against the Chinese yuan near CNY6.3775 before backing off. After selling Chinese bonds last month, foreign investors appeared to have returned since the middle of the month. The PBOC set the dollar's reference rate softer than expected today at CNY6.3640. The median projection in Bloomberg's survey was for CNY6.3663. The offshore yuan (CNH) strengthened for the first time in five sessions.
Europe
The takeaway from the flash euro zone PMI was that the regional economy was proving more resilient than expected to the war and related economic disruption. The aggregate manufacturing PMI slipped to 57.0 from 58.2 and better than the 56.0 median forecast. The German reading was stronger than expected at 57.6 (from 58.4), but the French report was slightly softer than expected at 54.8 (from 57.2).
The aggregate service PMI stood at 54.8 down from 55.5, and better than the 54.3 median forecast in Bloomberg survey. The German report (53.7 vs. 55.8 in February) and the French (57.4 vs 55.5) were better than expected. The EMU composite reading stood at 54.5, above the forecasted 53.8, even if lower than the 55.5 level seen in February.
The UK's flash PMI was mixed. Manufacturing slowed (55.5 from 58.0, and 57.0 expected). Services improved (61.0 form 60.5 and 58.0 expected). The composite held in much better than anticipated, slipping to only 59.7 from 59.9. The median forecast in Bloomberg's survey was for 57.5. Tomorrow, the UK is expected to report that retail sales slowed last month to 0.5%.
The market was still digesting the implications of yesterday's the Spring Budget statement. This year's GDP forecast was cut to 3.8% from 6%. Next year growth was seen slowing to 1.8%. The fuel duty was cut until next March. The basic personal income tax rate will be cut to 19% from 20% in 2024, which was understood to be just before the next parliament election. The Office of Budget Responsibility said that households still faced a 2.2% loss of disposable income, and that Chancellor Sunak offset about 1/6 of the tax increases imposed under his two-year tenure.
Russia's demand to be paid in rubles for its gas exports to "unfriendly" nations was a ruse. It was an irritant but of little substantive meaning. Currently, the gas was primarily paid for in euros (58%) and dollars (39%). If Putin's order sticks, the euros and dollars would first be sold to a bank [e.g., in Bulgaria, or Gazprom (MCX:GAZP)'s bank that had not been excluded from SWIFT] for rubles first.
Russia needs hard currency not rubles. The contracts may require euro or dollar payments, but arguably the sanctions created conditions for force majeure if the legalistic framework prevailed. The move could help the ruble strengthen, and that seemed to be the initial market reaction yesterday, but ruble trading was far from normal or transparent.
As widely expected, the Swiss National Bank kept its policy rate unchanged at -0.75%. Norway's Norges Bank delivered its third hike in the cycle that began last September. Its deposit rate now sits at 0.75%. It was seen as a hawkish hike as the central bank lifted its rate path and indicated plans to hike in June. It anticipated the deposit rate to rise to 2.50% by the end of next year. Previously, it had seen the policy rate at 1.75% at the end of 2023.
The euro went nowhere in the past three days. It continued to chop between $1.0960 and $1.1045. It settled near $1.1050 last week. The single currency spent this week so far in its narrowest range in five weeks. Last week's range was roughly $1.09-$1.1135. Continued consolidation was the most likely near-term scenario.
Sterling was a different kettle of fish. It reached almost $1.33 yesterday, its best level since Mar. 4. However, it seemed unimpressed with Sunak's budget and settled slightly above $1.3200. It pulled back further today, to almost $1.3155. Note that a large option (~GBP990 mln) was struck at $1.3150, which expires today. It also corresponded to a (50%) retracement of the rally since the Mar. 15 low near $1.30. A close above $1.3200 would help stabilize the tone.
America
The US has a busy economic calendar today. The data includes the Q4 current account, weekly initial jobless claims, durable goods orders, the flash PMI and the Kansas Fed's manufacturing survey. In addition, at least four Fed officials speak (Kashkari, Waller, Evans, and Bostic). They have all spoken recently and their views were known.
A consensus appeared to be emerging in favor of a 50 bp move at the May 4 FOMC meeting. The Fed funds futures pricing implied about a 75% chance of a 50 bp rather than a 25 bp move. In the next six meetings (the remainder of the year), the Fed funds futures strip had almost 190 bp of tightening priced in, which showed the leaning toward two 50 bp moves.
Mexico will report its bi-weekly CPI figures and January retail sales today, but the focus will be on the central bank. It was expected to hike its overnight rate by 50 bp to 6.5%. It would be the third such move in a row, and the second under the new governor. The swaps market had about 220 bp of tightening priced in for the next six months. Chile and Colombian central banks meet next week and were also expected to hike.
The US dollar fell to almost CAD1.2540 yesterday, its lowest level in two months. There was no follow-through selling today. Nearby resistance was seen in the CAD1.2600-CAD1.2625 area, which housed this week's high and the 200-day moving average. The swaps market was pricing in about a 2/3 chance of a 50 bp move by the Bank of Canada when it meets on Apr. 13. It may also begin to allow its balance sheet to shrink.
Latam currencies were five of the top six emerging market currencies this year. The South African rand was second, up about 8% this year, to the Brazilian real's 15.5% gain. South Africa's central bank was expected to lift its policy rate to 4.25% from 4.0% later today. The Mexican peso was up nearly 1.6% this year. It was near its best level since last October. There was little chart support for the greenback ahead of MXN20.00, but the low from October was near MXN20.12. The dollar had convincingly broken below BRL5.00 and the next important area was near BRL4.70.