Markets
There was a shift in focus in APAC markets from the latest developments in the Russia-Ukraine war to worsening COVID outbreaks in China.
Shenzhen’s government announced an effective lockdown on Sunday night until Mar. 20 and started mass PCR testing. There were broader restrictions of varying degrees across China, including Shanghai and the northeastern industrial hub of Changchun.
Shenzhen hosts major tech manufacturing operations for companies including Foxconn Technology (TW:2354) and Huawei. Reports suggested that Foxconn was suspending output at its Shenzhen HQ that will affect the production of Apple (NASDAQ:AAPL) products.
The first-channel effect of Shenzhen’s lockdown in APAC markets was tech equities: the Hang Seng Index was down ~8% today, falling below the Mar. 19, 2020 low. Second-order effects included the yet-to-be-determined impact on global supply chains and inflation, as well as growing domestic downside risks to China’s economy.
Ukraine and Russia discussions continued—European press was focusing on a military strike on the International Peacekeeping and Security Center around 20 miles from the Poland border in Western Ukraine over the weekend.
Iran stuck a missile in Northern Iraq, hitting the US Consulate under construction. Reports suggested that it missed its intended target. Iran suspended diplomatic talks with Saudi Arabia. The missile strike does not help nuclear deal talks.
Oil
Oil prices were marginally lower, despite the attack on Northern Iraq over the weekend and the suspension of talks with Iran last week, which suggested the market was now better able to quantify the supply shock, which was far from the worst-case scenario. The first pass response was to price in the shortfall requirement to backfill 3-4 mmb/d of Russian export, but now it’s likely in the range of 1-2 million barrels after some of the dust has settled.
Forex
USD/JPY bounced higher on Friday, which seemed like a catch-up move with US yields. But the upside move of USD/JPY exceeded the one implied by US yields, which made the pair screening rich.That said, Japanese real money names were usually fully hedged on their bond positions. As US bonds continue to sell off, they will need to buy back USD/JPY as they were over-hedged. Expect more of such rebalances into the Japanese fiscal year-end in March.
But, I think the two keys for higher USD/JPY were rising US yields and persistently bullish oil and LNG markets, as currencies of oil price takers should continue to get sold until energy markets veer lower.