Overview: US intelligence claims that Russia is
still mobilizing for an attack on Ukraine is sapping risk appetites and lifting
gold to its highest level since last June around $1885-$1890. Asia Pacific
equities advanced, except in Japan. Europe's Stoxx 600 is nursing a small
loss, while US futures are off around 0.4%-0.6%. The 10-year US Treasury yield
is hovering slightly above 2.0%. European benchmark yields are 2-4 bp
lower. The Scandis and euro are bearing the brunt of the risk-off
move among the major currencies, while the Antipodeans, yen, Swiss franc, and sterling have pushed higher. Emerging market currencies are mostly lower, led
by Russia and central European currencies, but the JP Morgan Emerging Market
Currency is edging higher for the fourth consecutive session, recovering from earlier weakness. Hungary left its one-week
repo rate steady at 4.3% and Turkey is expected to also stand pat (14%).
April WTI is retracing most of yesterday's 1.8% gain and is straddling
$90 a barrel. US natural gas is falling for the first time this
week. Europe's benchmark is up about 10% since Tuesday's 16% slide.
Iron ore slumped 7% after it rose 3.2% yesterday. Copper is slipping for
the first session in four.
Asia Pacific
Japan reported weaker than
expected exports and stronger than expected imports driving the trade deficit to
JPY2.19 trillion. It
was a third larger than expected. Seasonally, Japan's January trade
balance always (20-years-plus) deteriorated from December. Yet, there is
something more going on. Rising energy and commodity prices more
generally are deteriorating Japan's terms of trade. It shares that with
the eurozone that reported its largest trade deficit in 13 years earlier this
week. EMU's trade balance also typically deteriorates in January from December,
but surge in energy prices appears to have aggravated the seasonal
pattern. Meanwhile, nearly every day that passes now means that a
significant disruption of Russia's gas supplies could have a diminishing impact
on Europe as spring approaches.
Australia's jobs market held
up better than expected last month. It created almost 18k jobs. The market expected a
flat report. The positions created were all part-time posts, while
full-time positions fell by 17k after increasing 41k in December.
Australia grew an average of almost 3 full-time jobs last year after losing a
little more than 8k a month in 2020. While the unemployment rate was
steady at 4.2%, the participation rate ticked up to 66.2% from 66.1%. The
virus (sick-leave) and extended time-off (vacations) saw the hours worked fall
8.8% month-over-month. Australia's employment report is unlikely to
impact expectations. The market continues to price in the first hike
around mid-year. Rather than ratify market expectations, the central bank
continues to pushback.
The US dollar slipped
through JPY115.00 for the first time since February 7. The low was recorded in early
European turnover. The intraday momentum indicators are stretched, but a
break of the JPY114.90 could see JPY114.60. There is an option for nearly
$1.1 bln struck there that expires today. The JPY115.20 area may offer
the immediate cap. The Australian dollar was initially sold from
around $0.7210 down to $0.7150 before finding good bids. It
recovered back to session highs before stalling. It is straddling the
$0.7200 area in late morning turnover in Europe, leaving it little changed on
the day. The greenback briefly and shallowly slipped
through CNY6.33 and rebounded to almost CNY6.34. For the third
session in a row, the PBOC set the dollar's reference rate a little softer than
expected (CNY6.3321 vs. CNY6.3325, median projection in Bloomberg's
forecast).
Europe
The US claims that rather
than withdraw troops as previously reported, Russia has mobilized another 7k
troops. Moscow
denies it. Russia is involved in military exercises. The operations
in the Crimea appeared to have ended, but the ones with Belarus are expected to
last through the weekend. It seems like Russian troop movement next week may be
more telling. The G7 foreign ministers are meeting on Saturday.
NATO chief Stoltenberg's
term ends in October. He
will serve out his term before heading home to lead the central bank.
Norges Bank Olsen's term ends next month. Deputy Governor Ida Bache who
vied for the top job will act as interim head until Stoltenberg is ready.
The Norges Bank Governor also leads the $1.3 trillion sovereign wealth
fund. Last month, the central bank signaled its intention to hike rates
in March. The swaps market has 100 bp of tightening priced in over the
next 12 months.
The euro was sold slightly
through $1.1325 in Asia after holding below $1.14 yesterday. The $1.1380-$1.1400 area looks to
still cap upticks. The 1.7 bln euro in options struck in the $1.1435-$1.1450
area look set to roll-off today. If uncertainty over Russia's intentions is
a negative for the euro, the narrowing of the US two-year premium over Germany
for the third consecutive session is a supportive development. Sterling
is bid. It is trading above $1.36, which it has not settled above in
nearly a month. The intrasession high this month was set near $1.3645.
The UK reports January retail sales tomorrow and a bounce is expected
after January's large fall. The euro has fallen to back to around
GBP0.8350 near where it bottomed on Monday.
America
How prices respond to
fundamental news is often revealing. Yesterday, the US reports stronger than
expected January retail sales and industrial output figures. But the
two-year yield fell five basis points and the implied yield of December Fed
funds futures contract shed 4.5 bp. The two-year yield is another 3.5 bp
lower today and is about 1.5 bp lower on the week (slightly above 1.48%).
With today's five basis point slippage, the December Fed funds futures implies
an average effective yield of 1.53% at the end of the year, which is about 6.5
bp lower than where it finished last week after the US warned
of a possible Russian attack on Ukraine in days.
Europe, Russia, and Iran are
seemingly more optimistic than the US a deal with Iran may be near. With OPEC+ struggling to fulfill
their commitments to boost output by 400k barrels a day and low inventories
among many of the large consuming countries, new supply from Iran would help
ease address the global shortage that has lifted price to almost $100 a
barrel. Saudi Arabia is believed to have about 2 mln barrels a day in
spare capacity and is reluctant to jeopardize the six-year agreement under the
OPEC+ framework. The US EIA reported an unexpected build of US oil inventories
yesterday, but Cushing saw an almost 2 milt barrel draw.
The US reports January
housing starts and permits.
Both are expected to have softened but remain at historically elevated
levels. Although adverse weather may have impacted starts, the concern is
rising rates and commodity prices (e.g., March lumber has risen by around 25%
this month alone) will weaken demand. The US also sees the Philadelphia
Fed's manufacturing survey and weekly initial jobless claims.
Canada's January CPI
surprised on the upside yesterday. The 5.1% year-over-year headline pace was the highest since
1991, while the monthly increase of 0.9% was the largest since January
2017. Gasoline prices rose 3.2%, meat jumped a little more than 10%, and
homeowner equivalent expenses jumped 13.5%. The Bank of Canada is set to
hike rates on March 2. The market has about a 1-in-3 chance of a 50 bp
move discounted.
For about a week, the US offered a premium over Canada for two-year money, but it slipped back into a discount yesterday and is a little larger today. Oil is firmer, but the general risk-off mood, given the uncertainties in Eastern Europe, weighs on the Loonie. Meanwhile, the Canadian police have sent written warnings to hundreds who decamped in Ottawa. It appears to be a prelude to arrests. The US dollar remains confined to a CAD1.2650-CAD1.2660 to CAD1.2800 trading range. It approached the lower end of the range yesterday and is checking out the air above CAD1.27 near midday in Europe. The greenback finally took out the 200-day moving average against the Mexican peso. It is trading at its lowest level since last October (~MXN20.25-MXN20.26). There is little chart support ahead of MXN20.12. Still, the intrasession momentum indicators are stretched, warning against chasing it in early North American activity. A bounce can carry the dollar back to the MXN20.30-MXN20.33 area.
Disclaimer
Reviewed by Marc Chandler
on
February 17, 2022
Rating:
