Investors Fear Market Meltdown

Overview:  The stunning upside reversal in US stocks was not sustained.  The NASDAQ futures are off around 1.7% and the S&P 500 futures are nearly 1.2% lower.  Asian equities were hit hard, with China, Korea, and Australia off more than 2%.  Singapore unexpectedly tightened monetary policy (through the exchange rate) and the local stocks were off 1.3%.  Europe's Stoxx 600 is up about 0.7%, led by energy and financials.    Bond markets are drawing little support.  The US 10-year yield is up to almost 1.79% after testing 1.70% yesterday. European yields are mostly 2-4 bp higher, and the periphery is holding in better than the core.  The dollar is firm, though the Australian and Canadian dollars are the most resilient.  Among emerging market currencies, the Russian rouble is a little higher after the central bank indicated yesterday it would hold off its forex operations tied to managing its oil proceeds that involves buying foreign currencies.  The Singapore dollar has also edged higher.  The Chinese yuan ticked up even though bonds and stocks weakened.  The JP Morgan Emerging Market Currency Index is off for the third day, the longest losing streak this year.  Gold is slipping lower in the European morning.  March WTI is trading firmly and is around $84 after falling more than 2% yesterday.  US natural gas is off around 2.4% after rallying almost 6% in the past two sessions.  European natgas is slightly lower, and is consolidating near the three-day 25% surge.  Iron ore has fully recouped yesterday's 3% decline and copper has steadied after falling almost 4% in the past two sessions.  

Asia Pacific

Australia's Q4 CPI was higher than expected.  The key take away is to boost the market's confidence that the central bank will have to capitulate and raise rates considerably earlier than it has indicated.  The Reserve Bank of Australia meets early next week.  The market has moved to discount a greater likelihood of a June move.  The quarterly pace of inflation rose to 1.3% from 0.8% and lifted the year-over-year rate to 2.6% from 2.1%.  The median forecast (Bloomberg survey) was for a 2.3% annual pace.  The underlying measures also rose more than expected.  

The Monetary Authority of Singapore, which uses the exchange rate as its main monetary policy tool, unexpected (between meetings) raised the path slightly of the Singapore dollar.  The currency adjustment was in response to the one percentage point increase in its headline and core CPI projections.  This is seen as a preemptive move, consistent with its move last October.  

South Korea's growth accelerated to 1.1% in Q4 from 0.3% in Q3.  It was boosted by both exports and consumption (shades of "dual circulation?).  The year-over-year pace edged up to 4.1% from 4.0%.  The central bank hiked its policy rate 25 bp last month to 1.25%.  It hiked twice last year, and the swaps market has 75 bp of tightening discounted this year.  

The dollar tested the JPY113.50 area yesterday and recovered to JPY114.00.  It is probing session highs in the European morning near JPY114.10.  There is a $410 mln option at JPY114.35 that expires today.  Some position adjustments ahead of tomorrow's FOMC meeting may be helping the greenback, but the intraday momentum is getting stretched.  The Australian dollar is in the middle of its roughly $0.71-$0.72 range traveled yesterday.  The $0.7185-$0.7200 area offers the nearby cap.  Here too the intraday momentum indicators caution against chasing the market higher now.  Even without a bid from its asset markets, the Chinese yuan edged higher.  It is the fifth consecutive advance.  To put the yuan’s move this year in perspective, consider it has only fallen against the dollar in four sessions so far.  Against its trade-weighted basket, the yuan appears to be at a record high.  The PBOC set the dollar's reference rate at CNY6.3418, a little firmer than the market expected (Bloomberg median projection) of CNY6.3410.  Although some are drawing strategic conclusions about PBOC policy, we think a clear picture will emerge after the weeklong Lunar New Year holiday that begins next Monday. 

Europe

On the heels of yesterday's better than expected German flash PMI, the IFO survey was reported today.  The overall assessment of the business climate improved more than anticipated to 95.7 from 94.8. This snapped a six-month decline.  The improvement comes as the number of Covid cases surged.  The view of current conditions deteriorated to 96.1 from 96.9.  It is the fifth consecutive fall.  The improvement came from expectations, perhaps on ideas that things can't get worse.  The expectations component rose to 95.2 from 92.7.  It is the first increase since last June.  

Even before Gray's report on the internal investigation of "partygate" at 10 Downing Street, new reports add pressure to Prime Minister Johnson.  ITV News reported on Johnson's birthday party in mid-2020 during the pandemic restrictions that included at least 30 staff.  The report plays into the general sense of the Prime Minister who is a character that is well known.  Gray's report was expected to hold off a formal police investigation, but the London police have announced it has opened a probe.  Not helping matters, separately, a UK Treasury and Cabinet Office minister (Agnew) resigned ostensibly over the government's record in dealing with fraudulent claims on its Covid business loan program.  

The US and NATO are shoring up their defenses in Eastern and Central Asia.  This seems similar to Sweden's recent decision to send troops to the island it controls in the Baltic Sea.  The moves seem defensive in nature.  These, like the threats of financial and economic sanctions are well within the playbook that Russia would have anticipated.  Therefore, while prudent and cautionary, the military moves are unlikely to offer a powerful deterrent.  Meanwhile, the UK defense minister warned that Russian advance troops are already operating in Ukraine.  

Hungary is expected to hike its base rate by 30 bp today to 2.70%.  It would be the eighth hike in as many months, December CPI reported earlier this month rose 7.4% year-over-year (steady from November).  This will set the stage for another hike in the one-week deposit rate on Thursday. The deposit rate had been raised consistently from mid-November (1.80%) to 4% at the end of last year. 

The euro dipped below $1.13 yesterday but recovered to $1.1335.  It was unable to extend the recovery and new sellers emerged.  The lows are being recorded in the European morning near $1.1280.   Even though the intraday momentum indicator is overextended, it may be difficult for the euro to resurface above the $1.1300 level quickly as a 1.3 bln euro option expires there today.  This month's low is near $1.1270. Sterling, which we identified as particularly vulnerable in our weekly review of the price action slid almost 0.5% yesterday, its biggest loss this month.  It has been unable to overcome resistance at $1.35 (a GBP430 mln expiring option is also struck there) and looks poised to return to yesterday's low near $1.3440.  A break could signal a test on $1.3400. 

America

US house prices, the Conference Board's consumer confidence, and the Richmond Fed's manufacturing survey are not the data points that typically move the market.  This seems doubly true given the stock market's swoon, the conclusion of the FOMC meeting tomorrow, and the geopolitical strains in Europe.  The market has not been dissuaded from expectations of a March rate hike but has reined in thoughts it could be a 50 bp move.  Also, the market has trimmed its aggressiveness about more than four hikes this year, even though one large bank suggested a hike at every meeting starting in March was possible.  A week ago, the market was discounting about a one-in-five chance of a fifth hike.  Now a little less than four hikes are fully discounted in Fed Funds futures strip.  

The market has also pulled back a bit from its expectation of a hike tomorrow by the Bank of Canada. A week ago, the swaps markets had discounted an almost 83% chance of a hike.  Now, a little less than 2/3 chance is priced in.  Bloomberg's survey of economists seemed broadly split.  The median is for an unchanged stance, but the average is 36 bp, reflecting the close decision.  

Mexico's biweekly CPI was slightly firmer than expected yesterday, and the year-over-year rate slipped to 7.13% from 7.26%.  Today, Mexico reports November economic activity index, which is not a market-mover.  The central bank does not meet until February 10, and it will do so with a new governor at the helm.  The swaps market has about 200 bp of tightening this year discounted.  It is leaning to a 35 bp hike after a 50 bp move at the end of last year.  

The Canadian dollar suffered in yesterday's risk-off environment, and the greenback surged to CAD1.27 before pulling back along with the equity recovery to settle near CAD1.2640.  It is little changed in a tight range 20-pips or so on either side of the close.  An option expiring today for about $4235 mln at CAD1.2685 was likely neutralized yesterday.  The market may take its cues from equities.  The greenback rose to MXN20.67 yesterday and is near there are the North American market prepares to open.  The year's high was set on January 6 close to MXN20.76.  Above there, the initial risk is toward MXN20.82.  

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