Overview: Fear
of a Russian invasion of Ukraine, spurred by comments from US officials
triggered a dramatic market reaction ahead of the weekend, and it has continued
today. Risk has come off in many markets. Equities have
tumbled. Most of the major bourses in the Asia Pacific region were off
1-2%. Australia was a notable exception as its gold and energy stocks
lifted ASX 200. The Stoxx 600 is off around 2.5% near midday in Europe,
its third consecutive fall. US futures are off about 1% lower. Bond
markets are bid. The US 10-year Treasury yield is near 1.92% after poking
above 2% last week. European yields are 4-7 bp lower, and the peripheral
premium is edging wider. The yen and Swiss franc are firm, while the
other majors, led by the Scandis and Antipodeans are around 0.50%-1.0%
lower. Emerging market currencies are mostly lower, with central European
currencies particularly vulnerable. Gold is consolidating after surging
to three-month highs near $1865 before the weekend. Oil edged higher initially,
with the March WTI contract rising to almost $95 before steadying. US
natural gas prices are snapping a three-day decline to surge 5% today, while
Europe's benchmark is almost 10% higher. Iron ore was off around 1% for
its first back-to-back loss in a month. Copper is softer after falling
3.3% before the weekend.
Asia Pacific
The Bank of Japan
pre-announced its willingness to buy an unlimited amount of 10-year bonds at
0.25% today. However,
there were no offers for the first such operation in three years.
The fall in global yields saw the JGB yield ease slightly. The
BOJ's challenge of defending its Yield Curve Control policy is not over.
There are also other actions the central bank can take to reinforce its 0.25%
cap such as offering to buy at a fixed rate lower than the prevailing market
rate. Some upward pressure was seen on the longer-dated bonds, with the
20- and 30-year yields edging higher. Even if the exit from YCC is not
imminent, many see it as an ongoing BOJ challenge. Note that the Q4 GDP
deflator and the January CPI figures due this week are expected to show
deflationary pressures still evident.
The People's Bank of China
sets the one-year medium-term lending facility tomorrow. The rate was cut by 10 bp last month
to 2.85%. The market is split on whether another cut will be delivered
now. A Bloomberg poll found 16 of 27 expect no change, while the others
expected a 5-10 bp reduction. The PBOC is encouraging lending, and
officials have made it easier for property developers to tap cash from home
pre-sales. The cap on loans to develop public housing has also been
lifted.
After trading above JPY116
last Thursday and Friday, the dollar is poised to fall through JPY115.00 in
Europe. The
uptrend line connecting late January and early February is around
JPY114.95. Below there, support is seen in the JPY114.60-JPY114.75
area. The Australian dollar is coming under more selling pressure
in the European morning and is being pushed through $0.7100. Some
selling may be related to the A$1.13 bln option expiring today at
$0.7110. Last week's low was near $0.7065. The greenback
edged slightly higher against the Chinese yuan but remained in a particularly
narrow range within the pre-weekend price action. Yet it was the third consecutive session that the dollar traded above CNY6.36 on an intraday
basis but was unable to close above. The dollar's reference rate was set
at CNY6.3664, a little above expectations (CNY6.3661, Bloomberg
survey).
Europe
Over the past few days, a
handful of ECB officials have pushed back against speculation of a rate hike
near mid-year: Lagarde,
Lane, Rehn, Visco, and Makhlouf. Next month's meeting is still
important. There will updated forecasts and forward guidance, but the
guidance in December, including the sequence (bond buying continues under APP
until shortly before the first rate hike, and APP will be stepped up after the
buying under the PEPP effort concluded next month). Officials do not see
a wage impact but may seek faster access to wage data (suggested
Visco).
Last year, the Bank of
England unveiled its balance sheet strategy. It would recycle the maturing
proceeds of its bond holdings until the base rate reached 0.50%. It would
not actively sell its holdings until the base rate was at 1.0%. At the
time, the swaps market did not envision the 1% level being reaching for several
years. Now the market is pricing in about a 75% chance that it is reached
at the March 17 MPC meeting. At the end of last week, reports indicated
that the BOE was talking with the Debt Management Office about handling the
active sales. The central bank owns GBP875 bln of Gilts (~$1.2
trillion). The BOE is unlikely to begin selling off its holdings as soon
as it is able to. Pill, the BOE's Chief Economist, recently explained that
the 1% base rates are not a trigger for action but the beginning of the
discussion.
Ahead of the weekend, Fitch
cut Turkey's sovereign credit rating to B+ from BB- and retained a negative
outlook. It was a
catch-up move. S&P has Turkey as a B+ credit since August 2018.
It changed its outlook to negative last December. Moody's B2 equivalent
was adopted in September 2020 and maintains its negative outlook. With high inflation and a widening current account deficit (despite the
massive devaluation), the risk is of additional downgrades. DBRS gives
Turkey a high BB rating, which is the highest of the speculative
category. It has been there since July 2016 and seems a bit dated.
The central bank cut the one-week repo rate by 500 bp in the last four months
of 2021 to bring it to 14%. It was left there in January and is expected
to remain so when the central bank meets February 17.
The euro is under pressure. It is testing the $1.1300 area,
which is around the middle of its recent range. The (61.8%) retracement
of its rally from late January is near $1.1265. There is an option for
635 mln euros at $1.1240 that expires today. Resistance now is seen in
the $1.1325-$1.1350 area. Sterling has largely been confined to a
$1.35-$1.36 range since February 1. While shallow intrasession
penetration has been seen, the range has held on a closing basis. Today,
it has found bids slightly below $1.3500. Immediate resistance now is
seen around $1.3540-$1.3560.
America
The sell-off in the US 10-
year that followed the stronger than expected January CPI (7.5% vs. median
forecast in Bloomberg's survey of 7.3%) and the Fed's Bullard comments were
unwound in response to the US claim that the long-warned of Russian attack on
Ukraine could take place in the coming days. The US 2-year yield surged more than 21 bp
on the CPI/Bullard and fell back nearly eight basis points on the elevated
geopolitical tension. Some have argued that the market misunderstood
Bullard, though he seemed to be fairly clear about the key issue: favors a 100 bp increase in the next three meetings and wants to begin the unwinding of
the balance sheet quickly and aggressively. He will be on CNBC at 8:30 am
ET today. One should not be surprised if he does not walk back his
arguments. He has consistently been among the most hawkish
of Fed official.
The trucker-led protest that
disrupted Ottawa, Canadian production, and trade with the US appeared to end
over the weekend.
Several automakers, including GM, Ford, Stellantis, and Toyota cut
production. Of note, Canada raised an objection that some of the funding
for the protest may have been funded via US financial institutions. The
Ambassador Bridge has re-opened, but Canadian officials warn against
non-essential travel. Similarly inspired demonstrations have been seen to
varying extents in several European countries, including France, Netherlands,
Switzerland, Austria, and Belgium. There are some reports of a
like-minded demonstration in Washington DC around the March 1 State of the
Union address.
The risk-off moment and the deepening Canadian discount to the US on two-year money are helping lift the US dollar toward the upper end of its recent range against the Canadian dollar. The CAD1.28 area has capped the greenback since early January when it briefly traded around CAD1.2815 on an intrasession basis. Above there, the CAD1.2845-CAD1.2855 may offer resistance. Initial support is around CAD1.2720-CAD1.2740. Note that around $2.2 bln in options expire tomorrow in the CAD1.2695-CAD1.2700 area. The greenback jumped from around MXN20.3645 to MXN20.64 in the flurry before the weekend. However, like most emerging market currencies today, the peso seems sidelined. Still, the geopolitical overhang argues against a return to the 200-day moving average (~MXN20.33) it was testing in the second half of last week. The risk-off may weigh a bit more on Brazil, which has been one of the strongest emerging market currencies this month. It traded at its best level since September last week (~BRL5.1750) before the pre-weekend sell-off. The US dollar faces resistance near BRL5.30.
Disclaimer
Reviewed by Marc Chandler
on
February 14, 2022
Rating:
