Russia's decision to cut gas supplies to Poland and Bulgaria and the sharp sell-off in US equities yesterday cast a pall over the markets today. But not the dollar. The euro punched through $1.06 for the first time in five years and the greenback turned higher against the yen after falling to a seven-day low.
The major bourses in the Asia Pacific region fell by more than 1% except China and Hong Kong. The Hang Seng eked out a minor gain, but China's CSI 300 rose nearly 3%. Europe's Stoxx 600 gapped lower but recovered with the help of materials, consumer discretionary, and energy sectors. US futures were firm.
Treasury yields recovered part of yesterday’s decline, putting the 10-year near 2.77% and the 2-year close to 2.58%. European yields were mostly firmer and the core-periphery spreads were widening.
In the foreign exchange market, the greenback was mixed. The Antipodeans and Scandis were firm, especially the Australian dollar, after the higher-than-expected Q1 CPI. The yen, euro, and Swiss franc were heavy. Emerging market currencies were mostly lower. Of note, the Philippine peso and the Mexican peso were among the most resilient today.
Hungary, the only EU country that agreed to pay Russia in rubles, was among the weakest (~0.9%). That dubious honor goes to the South Korean won today, off 1.1%, the largest loss since last June and the fifth consecutive decline.
Gold was sold to fresh two-month lows near $1887 before steadying. June WTI was firm but in a narrow range (~$101.50-$103) near yesterday's highs. US natgas prices were almost 0.75% higher after gaining nearly 5% over the past two sessions.
Europe's benchmark rose about 8.2% yesterday on top of yesterday's nearly 6% gain. It was back to early April levels. Iron ore rose for a second consecutive session, while copper was trying to end a three-day fall. July wheat was steady after rising 2% yesterday.
Asia Pacific
Australia's Q1 CPI rose 2.1%, faster than the 1.7% anticipated by the median in Bloomberg's survey and well above the 1.3% increase in Q4 21. The year-over-year pace accelerated to 5.1% from 3.5%. The underlying measures also rose. The central bank meets next week, and the market sees the inflation figures as boosting the chances of a rate hike, which previously was expected after the May 21 election.
Yesterday, the market had about six basis points of tightening discounted for the May 3 meeting. Now there are 18 bp increase priced into the cash rate futures.
The Bank of Japan's two-day meeting began today. Officials have clearly signaled no intention to change course. Its defense of the 0.25% cap on the 10-year yield continued today, but the softer global yields yesterday took some pressure off the JGB market and there were sellers of 10-year bonds to the BOJ under its fixed-rate operation.
The BOJ was well aware that energy and food prices are lifting measured inflation and the reduction in wireless charges drop out of the 12-month comparison.
It pushes back and says that those developments do not make the increase in CPI sustainable. Note too that the new economic package estimated that 0.5% shave off headline CPI in the May-September period.
Many observers still seemed to put the cart before the horse. They were concerned that the weaker yen reduced Japanese demand for Treasuries. The recent prices action lended support for the hypothesis that the causation arrow was running the other way.
The increase in US yields weakens the yen. The US 10-year yield peaked on Apr. 20. So did the dollar against the yen. They both recorded eight-day lows earlier today and have recovered. Moreover, the indirect bids at the recent US Treasury auctions have been strong, including yesterday's two-year note sale. That was where foreign participation was often picked up.
The dollar found a bid after slipping a little below JPY127. A $540 mln option at JPY126.75 rolls off today. The greenback resurfaced above JPY128. A move above JPY128.25 would lift the tone, but it needed to get above JPY128.50 to sign another attempt on the JPY129.50-JPY130 area.
The Australian dollar recovered from around $0.7120 to almost $0.7200, but the upside momentum faltered and it fell back to the $0.7140 area in late Asia Pacific turnover. That said, the intraday momentum indicators suggested the potential to retest the highs in North America.
The Chinese yuan was trading in its narrowest range for a little more than a week. The dollar was consolidating its recent gains and traded roughly between CNY6.5480 and CNY6.5615. The cut in reserve requirements for foreign currency deposits appeared to have succeeded not in pushing the yuan higher, but in steadying the exchange rate. The PBOC set the dollar's reference rate slightly higher than expected in the Bloomberg survey (CNY6.5598 vs. CNY6.5596).
Europe
In a bizarre turn of events, Russia was insisting on being paid rubles for its gas while Europe was insisting adhering to contracts to pay in hard currency, euros. Russia was making good on its threats and announced that it was cutting off gas supplies to Poland and Bulgaria. Poland's gas supplies were around three-quarters capacity, so the cut of new supply will not pinch immediately.
Bulgaria indicated it had taken steps to secure alternative supplies. Russia's actions do raise the question of who is next and that will likely be seen next month. That said, Europe's reluctance or inability to move quicker on gas reveals their vulnerability, which Russia was exploiting.
It was quitting Europe before being fired, in a way. Meanwhile, the tensions were rising in Moldova's breakaway region. Some argued that Russia ultimately will likely link up the parts of Ukraine that it appeared to be trying to take with the Moldova region, which would pen-in Ukraine.
Musk's leveraged buyout of Twitter (NYSE:TWTR) was spurring a debate about freedom of speech in the US. The constitutional right protects US citizens from abridgement of that right by Congress, not by the private sector. Clearly, newspapers do not have to print all the op-ed submissions it receives and is not denying the rejected authors their freedom of speech.
In Europe, the reaction was different. Musk was reminded that Twitter, regardless of its ownership structure, must adhere to the Digital Services Act, approved last week. It forces the platforms to moderate illegal and harmful content that their users post.
The 1.4 bln euro option at $1.06 that expires today appeared to have been neutralized. The euro fell to about $1.0585 in late Asia/early Europe. Initial resistance was seen near $1.0630 and then $1.0660. On the downside, the 2015-2017 lows were in the $1.0340-$1.0530 area, but there was increasing talk of a move to parity which has not been seen since 2002.
Sterling's losses were also extended. It fell to about $1.2535 before recovering to around $1.2590 in the European morning. The $1.25 area represented the (61.8%) retracement of sterling's rally off the March 2020 low near $1.14. The next chart point below there was the June 2020 lows around $1.2250.
Over the last five sessions, sterling has shed more than nickel. The lower Bollinger® Band was set two standard deviations below its 20-day moving average and sterling's losses were nearly three standard deviations below the 20-day average.
America
The US reports mortgage applications, which have fallen every week since the end of January but one. March pending home sales were expected to have fallen for the fifth consecutive month. The March trade deficit, which remained near a record imbalance, and March (wholesale and retail) inventories will help economists put their final touches on Q1 GDP forecasts ahead of tomorrow's report.
Due to the revisions in retail sales reported earlier this week, the Atlanta Fed's GDP tracker fell to 0.4%. It will update it again after today's reports.
As noted, there was a strong reception at yesterday's US sale of $48 bln two-year notes. Indirect bidders took down 2/3 and direct bidders took another 21.4%. This left the dealers with slightly more than 12%, the least almost two decades. On tap today are a $30 bln two-year floater auction and $49 bln 5-year note sale. Still, the angst in some corners of the market about the implications of a strong dollar on foreign demand was unlikely to dissipate.
Bank of Canada Governor Macklem laid out the logic of raising rates even though it will have little impact on the prices of internationally traded goods that are understood to be the main drivers of Canadian inflation. He argued that keeping inflation expectations anchored will ease prices when the higher energy and disrupted supply chains ease.
Mexico reports its March trade figures. The balance may have swung into a small deficit after a $1.29 bln surplus in February. Tomorrow it reports unemployment figures ahead of Friday's preliminary Q1 GDP. After a flat Q4 21, it was expected to have grown around 1% in Q2 quarter-over-quarter.
Brazil reports April's IPCA inflation measure today. It was expected to have accelerated to 12.15% from 10.79% in March. This will further challenge the signals by the central bank that next month could be the peak of what has been an aggressive tightening cycle.
The risk-off mood, which unlike when Russia first invaded Ukraine, was now seen as negative for commodities and commodity currencies. The Canadian dollar suffered in this phase despite constructive macro considerations. The US dollar bottomed last week near CAD1.2460 and today approached CAD1.2850. The year's high was set in early March slightly north of CAD1.29. The greenback closed above its upper Bollinger Band for the last three sessions and remained above it (~CAD1.2810) now.
The greenback remained within the range set on Monday against the Mexican peso (~MXN20.16-MXN20.4850). A convincing break of MXN20.50 could spur a quick move toward MXN20.60-MXN20.65. Note the upper Bollinger Band was found today slightly above MXN20.40.
The Brazilian real, has been a market favorite this year, with high yields, monetary policy near a peak, and commodity exposure. However, alongside Latam in general and the setback for metals, market participants have raced to reduce exposure in both the options and forward markets. The dollar jumped from around BRL4.60 a week ago to nearly BRL5.00 yesterday. A move above there today could target the BRL5.20 area.