It was a lighter start to the APAC session this week, with markets in China and Taiwan closed for a holiday; however, the Russia-Ukraine conflict continued to be the primary driver of markets.
Still, more indirectly than ever before, the implications on inflation, commodity prices, and liquidity were more relevant than direct military conflict in market perception. These effects have created a toxic and uncertain environment where active investor participation has often been limited.
Risk sentiment over the past week was inconsistent; market signals could be characterized by a repetitive cat-and-mouse game whereby headlines initially emerge around the progress in ceasefire talks before being typically walked down by Russian officials who deny the odds of any close peace deal.
But Russian Risks were offset by a limited rise in real yields and a drop in equity market volatility. And with earnings season only two weeks out, stable profit expectations could help stocks.
The broader macro narrative remained unchanged; however, sentiment was becoming more bearish as recession fears grow and more folks latched on to their favorite part of the yield curve to predict recessions.
Frustrated seemed to be the best way to describe the trading community. Yet, the market has proven to be more resilient than expected in the face of an increasingly hawkish Fed.
Finally, the coming weeks may reveal the permissibility behind these ceasefire talks and the continuous effects of economic sanctions on Russia and its financial existence, giving more purpose and direction to many of the meandering flows in forex.
Oil
This morning, oil opened slightly lower in Asia after a media report suggested the Houthi group agreed to a 60-day truce with Saudi Arabia that temporarily reduces one potential supply disruption source. Still, the fragile détente does little to alleviate the absence of Russian oil.
With OPEC sticking to the current mantra that geopolitical developments rather than fundamentals cause recent volatility, the IEA members will have to do the bulk of the heavy lifting to intervene and backfill a portion of Russian supply loss for now. But with Iran negotiations still a work in progress, this bought a bit more time for talks and OPEC quotas to catch up and production cuts to unwind.
It seemed like a lot of speculative top-end juice was squeezed out of the market, and traders were waiting for a headline to jump on.
Unfortunately, for energy consumers and in the absence of more OPEC production, demand collapse and recession were the only price lowering mechanisms available in a world devoid of inventory buffers, suggesting prices will remain sticky for a while as the release of U.S. and IEA inventories would not be an endless supply source for the coming years.
Forex
JPY
The easiest thing to do was to raise policy rates to stem the yen weakness. But this looked easier said than done, especially since Kuroda commented on Mar. 18 that the BoJ would not start normalizing its policy regardless of the expected rise in CPI inflation to around 2%.
The verbal intervention has started, but any form of F.X. intervention does not have lasting legs and typically only offered a better level to sell JPY unless accompanied by a policy twist. With that in mind, all eyes were on the next BoJ policy meeting on Apr. 28. But in the meantime, unless there would be a shift lower in U.S. front-end rates, we should expect a weaker JPY glide path.
CAD
Higher oil prices had generated hawkish risks to the Bank of Canada's monetary policy glide path. The Fed's intensified hawkish stance and Canadian GDP growth for February encouraged the BoC's policy to resolve. Before the strong GDP report, the BoC considered a 50bp hike in April, so it would be a huge surprise if they did not deliver on cue.