What would it look like if Russia was on the verge of attacking Ukraine?
Cyber-attacks. Check. Violation of the cease fire with the separatist regions. Check. Almost 2000 such violations were recorded on Saturday alone, according to the Organization of for Security and Co-operation in Europe.
Extending the military exercises with Belarus. Check.
However, just as Asian markets were opening on Monday, Macron's efforts toward a Biden-Putin summit were accepted in principle. Still, risk appetites in markets remain muted. The MSCI Asia Pacific Index extended last week's 0.9% fall. The Stoxx 600 Index is nursing modest losses near midday after falling almost 1.9% last week. It has risen only one week so far this year. US futures are narrowly mixed though stock and bond markets in the US are closed today.
European bonds yields are 2-4 basis points firmer. Perhaps, it is in the foreign exchange market where risk appetites appear the strongest. The dollar is offered against most currencies today, and the Japanese yen is a laggard. The Australian dollar and Scandis are leading the advance. The Swiss franc is also one of the strongest majors.
Among emerging market currencies, the central European currencies are the best performers today. The JP Morgan EM FX index is moving higher for the fifth session of the past six. Gold initially extended its gains and saw $1908 before returning to the $1890 area. April WTI is hovering around $90 a barrel. US NatGas is up about 5.3% after losing about that much over the past two sessions. European NatGas is up 1.7% after falling 2.8% before the weekend. Iron ore prices jumped 4.6% to recoup a chunk of last week's 11% slide. Copper is firmer for the first time in three sessions.
Asia Pacific
Japan's preliminary PMI underscores expectations that after rebounding in Q4 21, the world's third-largest economy is struggling at the start of 2022. New COVID restrictions imposed in late January ae taking a toll. The manufacturing activity slowed. The manufacturing PMI fell to 52.9 from 55.4. Services disappointed. The services PMI dropped to 42.7 from 47.6, and this kept the composite PMI well below the 50 boom/bust level at 44.6 from 49.9.
Australia's flash PMI was better. The manufacturing reading rose to 57.6 from 55.1. The service PMI jumped to 56.4 from 46.6. The composite recovered to 55.9 from 46.7. The Reserve Bank of Australia meets on March 1. The market expects a rate hike priced into the July meeting, which the Governor Lowe has pushed against.
The dollar is holding below JPY115.00 in the European sessions after peaking near JPY115.10 in Asian turnover. Initial support around JPY114.80, the pre-weekend low is being tested. Below there, nearby support is seen around JPY114.60, and a break could spur a move toward JPY114.00-JPY114.20.
The Australian dollar is trying again to secure a foothold above $0.7200. It traded above there on an intrasession basis for the past three sessions, but a close above there has been elusive for a month. The next upside target is the spike high earlier this month to almost $0.7250.
The Chinese yuan is among the weakest currencies today. It is off about 0.15%. The US dollar initially drew closer to CNY6.32 before rebounding nearly the pre-weekend high CNY6.3365. After setting the dollar's reference rate for the past four sessions, lower than the Bloomberg survey projected, the PBOC returned to its more normal practice. The dollar was fixed at CNY6.3401compared with the Bloomberg survey median of CNY6.3388. The loan prime rates were left unchanged, as widely anticipated. Note that the 10-year Chinese bond yield rose nearly four basis points to 2.83%. The biggest state-owned banks cut mortgage rates for home buyers in Guangzhou, which followed last week's report that lending in other cities were reducing down payment ratios.
Europe
The eurozone aggregate flash February PMI was stronger than expected. The manufacturing PMI slipped slightly but at 58.4 (from 58.7) remains at elevated levels. The service PMI rose to 55.8 from 51.1, which lifted the composite to 55.5 from 52.3. Prices jumped by a record amount. The preliminary German readings were in line with the aggregate. Manufacturing slow slightly (58.5 from 59.8), while services activity accelerated (56.6 from 52.2). The composite rose to 56.2 from 53.8. In France, the services PMI surpassed the manufacturing PMI as the post-Covid recovery strengthened. The manufacturing PMI rose to 57.6 from 55.5. The services PMI rose to 57.9 from 53.1. The composite stands at 57.4 after 52.7.
The UK's manufacturing PMI as steady at 57.3. The market had seen the risk of a small decline. The services PMI surged to 60.8 from 54.1. This lifted the composite PMI to 60.2 from 54.7. It is the highest since last June. A week ago, the swaps market was discounted about an 80% chance of a 50 bp hike at the mid-March BOE meeting (March 17). It has been downgraded to about 37% chance.
The euro has covered the past three-days range today. It initially took out the pre-weekend low to draw nearer $1.13 before rebounding to almost $1.14 in late Asian turnover. It was met by a wall of sellers that knocked it back to $1.1355 before stabilizing. It has traded on both sides the pre-weekend range, and the close is seen as technically important if it is outside of the $1.1315-$1.1380 range. The possible Biden-Putin summit, provided there is no invasion, looks likely for next week with the Blinken-Lavrov meeting later this week setting the stage.
Sterling is bid near this month's highs (~$1.3645). It is also the fourth session of higher lows. The next target is the 200-day moving average near $1.3685, and it has not settled above it since last September. Indeed, it has closed above $1.36 only once in the past month. The intraday momentum indicators suggest the session's high may be in place.
America
The US stock and bond markets are closed today. Tomorrow, the flash PMI, house prices, the Conference Board's consumer confidence survey and the Richmond Fed manufacturing survey are due. Midweek, Q4 21 GDP is likely to be revised slightly higher. At the end of the week, the January personal income and consumption figures are reported. Alongside them will be the PCE deflator. The headline, which the Fed targets, is expected to rise to 6% from 5.8%. The core measure, which Fed officials often refer to, is expected to rise to around 5.2% from 4.9%. Still, the market has downgraded the chances of a 50 bp hike when the FOMC meeting concludes on March 16. A week ago, the Fed funds futures were implying about a 65% chance, and now less than 25% of a large move. A week ago, the market was pricing in about a 50% chance that there would be 175 bp instead of 150 bp increases this year. Now the market is just below 150 bp.
Canada has a light economic diary this week. The Bank of Canada meets on March 2. The swaps market is pricing in little more than a 50% chance of a 50 bp hike. A week ago, there was slightly better than a one-in-three chance. Meanwhile, reports indicate that the police have cleared the downtown Ottawa area of protesters. Nearly 200 arrests were made and as of yesterday, more than 200 bank and corporate accounts were frozen. Downtown businesses have not yet returned to normal.
Mexico reports biweekly CPI figures in the middle of the week. The year-over-year pace is expected to have remained above 7.0% where is has been since the middle of last November. Still, with a 25 bp hike by the Fed more likely than 50 bp, Banxico, which meets on March 24, is also likely to hike by a quarter of a point. Recall the last two moves have been 50 bp. December retail sales, also due on Wednesday, are dated, while the January trade balance at the end of the week is expected to show marked deterioration. The week's highlight for Brazil is this month's IPCA inflation reading (due in the middle of the week), which is expected to have ticked up to 10.6% from 10.2%.
The US dollar has been largely rangebound against the Canadian dollar here in February. Support is seen in the CAD1.2650-CAD1.2660 area. The ceiling is CAD1.28. The broader risk environment appears to have eclipsed the rate differential driver and the impact from commodities.
Meanwhile, the greenback was sold below the 200-day moving average against the Mexican peso which continues to hold below it (~MXN20.3450). Last week's low was about MXN20.2360. There is little chart support until closer to MXN20.12, the low from last October. The US dollar fell to almost BRL5.11 ahead of the weekend, its lowest level versus the Brazilian real since last July. Support is seen in the BRL5.00-BRL5.05 area. Last year's low was set in June near BRL4.8935. Strong foreign demand for Brazil bonds and stocks could fuel a retest.