US equities failed to sustain early gains yesterday, but risk appetites returned today. Asia Pacific equities had a poor start, and Chinese, Japanese, and South Korean indices moved lower, but the equity benchmarks in Taiwan, Australia, India, and most of the smaller markets traded higher.
Taiwan's 1.1% gain was notable as foreign investors continued to be heavy sellers. Europe's Stoxx 600 was snapping a four-day drop with an impressive 3.3% gain, led by the financials, consumer discretionary, and information technology. US futures were trading 1.5-2.0% better. We note that crypto rallied strongly as well.
Benchmark yields were rising. The US 10-year yield was up five basis points to 1.90%. European yields were 2-6 bp higher. China and Australia's 10-year yields reached new highs for the year.
The dollar was broadly softer. Of the majors, only the Japanese yen was weaker. The beaten-up Swedish krona was setting the pace with more than a 1% rise. The euro was testing $1.10, a three-day high. Central European currencies were leading the emerging market currencies.
Gold peaked yesterday near $2070.50 and was coming off that high. It was near $2011 near midday in Europe. April WTI was below $122 after reaching $130.50 yesterday. US natural gas was a little softer, down 10% in the past two sessions, while the European natgas benchmark was off 15.5% and was lower on the week.
Nickel was limit up in Shanghai and was not expected to rest this week in London. Iron ore prices eased, while copper was lower for the third consecutive session. May wheat was off around 5.5%.
Asia Pacific
China's February CPI was steady at 0.9%. The decline in food prices (3.9%) offset the increase in non-food prices (2.1%). Pork prices were still a drag (-42.5%). Core prices eased to 1.1%, which was the lowest since last June, from 1.2%. Producer prices rose 8.8% from a year ago from 9.1%. It matched the slowest pace since April 2021. On the month, it rose 0.5%, the first increase since last November.
Three other developments in China to note. First, some reports suggested there was movement to allow a new Chinese IPO in the US later this year. Second, there was talk that Chinese companies could take an equity stake in some large Russian companies to secure food, energy, and material supplies.
The sharp depreciation of the Russian ruble made its fire sale for Chinese companies. Third, the latest American Chamber of Commerce survey showed little change from the past few years that almost 85% of US companies do not plan to move operations out of China, even if some tech companies looked to diversify and build duplicate facilities.
Governor Lowe of the Reserve Bank of Australia's acknowledgement that a hike later this year was plausible, seemed to reflect a subtle shift in his position. The market, which had already been pricing in a more aggressive path that the RBA had signaled, took the bait, pushing the implied yield of Australia's cash rate futures 3-5 bp higher. The market was leaning towards a hike in June (~75% chance) and had slightly more than 30 bp of tightening priced in by July.
The dollar was firm against the yen near JPY115.90. It was the strongest level since Feb. 11, when the US first warned that Russia was ready to attack Ukraine. It has not settled above JPY105.80 since Feb. 10. We suspect it could retest the multiyear high seen twice this year near JPY116.35 in the coming days.
The Australian dollar was finding its bearings after shedding two cents from Monday's high around $0.7440. It was testing the 200-day moving average (~$0.7320). The $0.7345-$0.7365 band may hold back stronger gains today.
The greenback reached a nine-day high against the Chinese yuan by CNY6.3270, but was sold back down to CNY6.3140. The PBOC set the dollar's reference rate at CNY6.3178. The market (Bloomberg survey median) was for CNY6.3166. According to reports, the PBOC transferred CNY1 trillion (~$160 bln) to the government. The Chinese central bank, like other major central banks, gives the government some of its profits every year. Apparently, it was the first time the amount had been disclosed. Lastly, early exit polls in South Korea were mixed in a close race between Lee and Yoon.
Europe
Russia intensified the bombing of Kyiv. Ruble trading re-opened in Russia for the first time this week, while the equity market remainsed closed. Moscow will restrict trade in unspecified goods and raw materials. The market appeared to be pricing in an imminent default. Meanwhile, a growing number of US consumer companies, from McDonald’s (NYSE:MCD to Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP), Starbucks (NASDAQ:SBUX), and PayPal (NASDAQ:PYPL) were joining the boycott of Russia.
Poland's offer to send more than two dozen Russian-made fighter planes to a US airbase in Germany for transfer to Ukraine appeared to have been shot down by the US. War planes departing from a NATO base and flying into Ukraine airspace, as contested by Russia, spurring a clash between NATO and Russia, was being avoided. The talk of Poland's offer had circulated earlier this week, but the US seemed taken aback by the formal offer.
While the EU has waived all visa requirements for Ukrainian refugees and granted them automatic three-year stays, the UK has not followed suit. It was requiring paperwork and computer upload of documents. This triggered widespread criticism of Home Secretary Patel, and some of the fiercest comments came from within the Tory Party. Around 760 Ukrainian refugees have been granted visas by the UK.
Italy's January industrial production figures were much worse than expected, posting a 3.4% decline, compared with the median forecast of a 0.5% decline. Recall that German industrial output rose 2% vs. expectations for a 0.5% gain, and the December decline was revised to a 1.1% gain. French output was expected to also have risen by 0.5%, but it rose by 1.6%. Spain's industrial production fell by 0.1%. The market had forecast a 1.0% gain, but December's 2.6% contraction was revised to a fall of 0.5%.
The euro bottomed near $1.08 on Monday and was testing $1.10 in the European morning. The $1.10 area corresponded to a (38.2%) retracement of the losses suffered since the Russian invasion began. The next retracement (50%) was close to $1.1060. What appeared to be a short-covering squeeze was stretching the intraday momentum indicators. North American dealers may be inclined to sell into the two-cent bounce.
Sterling tested yesterday's low below $1.3090 initially before recovering. It reached $1.3180 in the European morning. Monday’s was closer to $1.3260. The intraday momentum indicators were also stretched and $1.3200 may offer a nearby cap.
America
Outside of the January JOLTS report, the economic focus in the US would be on the budget bill to avoid a government shutdown and the Biden administration's crypto strategy. Canada's economic calendar was light. Mexico reports February CPI figures. The headline rate was expected to reach near 7.25% from a little more than 7.05% in January. It would be the fourth consecutive monthly reading above 7%.
The core rate was expected to approach 6.6% from about 6.2% in January. It averaged about 5.6% in Q4 21. A 75 bp rate hike later this month seemed increasingly likely.
Brazil reports January industrial production figures. It was expected to have unwound almost two percentage points of the nearly 3% increase seen at the end of last year. Brazil's central bank meets next week and was expected to deliver a 100 bp hike after three 150 bp hikes (October, December, and January). The swaps market had about 275 bp of tightening discounted over the next 12 months.
The US dollar rallied from a little below CAD1.26 last Thursday to a new high for the year yesterday near CAD1.29, as a result of risk-off and the widening US two-year premium over Canada. (At the end of January, the yields were almost identical, now the US is at a 20 bp premium. At the end of last year, it was Canada that offered the 20 bp premium.)
In any event, the risk-on mood today saw the greenback return to the CAD1.28 area. It had been resistance, and now at first blush, support. The CAD1.2780 area was the (38.2%) retracement objective of the greenback's leg up.
The Mexican peso had been thumped hard since the war broke out, but was stabilizing today. The US dollar rallied a little more than 6% against the peso since Russian troops invaded Ukraine. It poked above MXN21.4670 yesterday and was offered around MXN21.2350 in near midday in Europe. Initial support was seen around MXN21.15, but the MXN20.95-MXN21.00 may offer stronger support.
The Brazilian real fared considerably better. The US dollar initially bounced from BRL5.0 to above BRL5.20 but was holding mostly below BRL5.10 in recent sessions.