Overview: A powerful short squeeze in nickel
saw the price double for the second day before the London Metal Exchange
suspended trading. It had allowed traders to defer delivery
obligations. However, other key commodity markets are a bit calmer
today. April WTI is in a $3 range on either side of $120. US
natural gas is about 3% lower after a 3.6% loss to start the week. European natgas is seeing early gains of more than 11% pared back to around 2.5%. Copper is a little firmer after sliding
more than 4% yesterday. Iron ore slipped after rising 5.7% on
Monday. Wheat is threatening to snap a six-day 50% rally. Turning to the
capital markets, after a rough start in the Asia Pacific, which saw most
bourses slump 1%-2%, except India, equities have stabilized. Led by
strong gains in utilities and financials, Europe's Stoxx 600 is up about 0.4%
near midday, as earlier stronger gains are pared. US futures are showing small gains. Yields recovered
yesterday in the US and Europe, and Asia Pacific played catch-up earlier
today. Europe's peripheral bonds are outperforming the core markets
today. The US 10-year benchmark yield is up about seven basis points to
1.85%. The Scandis and euro are enjoying modest gains in the foreign
exchange market, while the dollar-bloc, which reversed lower yesterday
continues to trade heavily. The yen and Swiss franc are also under modest
pressure. Among the emerging market complex, the central European currencies
are enjoying a reprieve from the recent selling, as the market awaits the
Polish central bank decision. While most expect a 50 bp hike, the larger
than expected Hungarian move last week, and zloty weakness that spurred central
bank intervention, warns of an asymmetrical risk of a larger hike. The JP
Morgan Emerging Market Currency Index is off about 0.4%, after falling almost
3.5% over the past three sessions.
Asia Pacific
Anecdotal reports seemed to
suggest that several large asset managers reduced their exposure to Chinese
bonds last month. Bloomberg reports that global funds appeared to have sold CNY35
bln (~$5.5 bln) of Chinese debt last month, which would be a record
amount. Since the Russian invasion of Ukraine (February 24),
Chinese bonds have performed miserably (30th of 46 sovereign bond markets
Bloomberg tracks). Some suspect that Russian names may have
liquidated some Chinese bonds to help buffer the sanctions. Chinese bonds
had been touted a safe haven, but the 10-year yield is up about 15 bp since
late January. Reports also suggest mainland investors, including
domestic funds, brokerages and commercial banks were also sellers.
Japan reported an
unexpectedly strong rise in January cash earnings, but a larger than expected deterioration
of its current account. Labor cash earnings, which fell by 0.4% year-over-year in
December, jumped 0.9% in January. The median forecast in Bloomberg's
survey was for a 0.1% gain. It is the largest rise since last
May. Unlike what many workers are experiencing in Europe and North
America, real wages rose in Japan (0.4% year-over-year). It is too early
to draw a conclusion about the trajectory. A survey in the Nikkei of more
than 6000 companies showed almost a third do not intend to raise wages in the
fiscal year beginning April 1. Most planned to grant raises by less than
the 3% Prime Minister Kishida advocates.
Japan's current account
balance always (more than 20 years) deteriorates in January from
December. The
deterioration was more than expected this year as the deficit widened to
JPY1.19 trillion from JPY370 bln. Most of the worsening came from the
trade balance. The deficit swelled to JPY1.6 trillion from almost JPY319
bln. In January, Japanese investors bought JPY1.15 trillion (~$10
bln) of euro-denominated bonds, the most in more than a year. They
divested JPY15.4 bln of Russian bonds, the most in almost eight years. Japanese
investors were also sellers of US and Australian bonds.
The dollar is trading with a
firmer bias against the Japanese yen. It reached a three-day high near JPY115.65.
Recall it briefly traded below JPY114.80 yesterday. The greenback has not
traded above JPY115.80 since mid-February. We suspect that will
cap advances today, barring new developments. Support is seen in the
JPY115.20-JPY115.40 area initially. The Australian dollar staged
a stunning reversal yesterday, falling from around $0.7440, its highest level
since early last November, to nearly $0.7310. Follow-through
selling today pressured it to almost $0.7265 where new bids were found. There
are about A$1.2 bln in options struck in the $0.7250-$0.7254 area that expire
today. The dollar opened near CNY6.3160 and briefly dipped
below CNY6.31 before snapping back to its opening levels. The PBOC
set the dollar's reference rate weaker than expected at CNY6.3185 compared with
expectations (Bloomberg survey) for CNY6.3239. Some suggest that the rouble's
volatility is making it more difficult to anticipate the fix. There is no
onshore price for the rouble exchange rate. Many are relying on offshore
indications where spreads are very wide.
Europe
The recent string of German
economic data suggests the economy was off to a strong start of the year before
Russia's hostilities. Yesterday, Germany reported a slightly stronger than expected 2%
rise in January retail sales and a 1.8% rise in factory orders (1.0%
expected). Today, Europe's largest-economy reported a 2.7% jump in
industrial output, more than five-times the gain expected by the median
forecast in Bloomberg's survey. And on top of that the 0.3% fall in
December's industrial production was revised away. It rose
1.1%.
US legislation to ban
imports of Russian oil and gas is making progress. Europe says it is working on
cutting Russian gas imports by 2/3 within a year. Russia is threatening
to cut Nord Stream 1 gas deliveries. Separately, JP Morgan indicated it
will remove Russian bonds from all of its indices, which are used as benchmarks
for asset managers. MSCI and S&P have taken similar
actions.
The European Commission is
reportedly set to propose a large joint bond issue to finance defense and
energy projects. An
emergency EU summit (heads of state) will be held on Thursday. This
follows last year's initiative that included joint debt to fund a 1.8 trillion
euro (~$2 trillion) emergency package. The details are still being worked
out, but the prospect seems to be helping support the euro today and narrowing
the spreads between core and peripheral bonds.
The euro is trading within
yesterday's range (~$1.0805-$1.0960). It could be the first session in seven that the euro does
not take out the previous session's low. Still, there is little
enthusiasm or energy on the upside. A move to $1.0920 in late Asia seemed
to attract sellers in early European turnover. Initial support is seen
around $1.0850. Note that the lower Bollinger Band is near $1.0880. Sterling
was not as lucky. It fell below $1.31 for the first time since
November 2020 in late Asian activity but has rebounded in the European morning
to around $1.3135. There may be scope for additional near-term gains, but
they look to be limited to the $1.3150-$1.3170 area.
America
Average US gasoline prices
are north of $4 a gallon, the highest since 2008. Last week's 10% rise lifted the
year-over-year increase to around 50%. Oil imports from Russia accounted
for 245 mln barrels last year or around 8% of US imports, which is less than Mexico
and Canada, but more than Saudi Arabia. The US imported 198 mln barrels
of Russian oil in 2020.
Coinbase announced it froze
thousands of Russian crypto accounts. Switzerland said that it too was freezing crypto assets
owned by Russian individuals and companies that had been sanctioned by the
EU. The Biden administration is expected to outline the government's
broad approach to crypto later this week. Some fear that Russia could use
crypto to bypass the sanctions. Meanwhile, note that the US Congress is
coming against Friday's deadline for funding the government. However, the
failure to do so would likely generate another continuing resolution rather
than a government shutdown.
The US reports the January
trade deficit. It
likely deteriorated by almost 10% to more than $87 bln. Some US imports
are likely going to rebuild inventories. Canada reports its January
merchandise trade balance and after a small deficit in December, it is expected
to have swung back into surplus. Canada is experiencing a positive terms
of trade shock fueled by rising commodity prices.
The US dollar dipped below
CAD1.26 in the middle of last week. This was the lowest level for the greenback since
late January and looked to be a breakout. However, this year has seen
many false breaks, and this was another one. The US dollar reversed
higher off that low and rallied about 1.8% through yesterday's high, which was
above CAD1.28. Follow-through buying has the greenback near CAD1.2835 in
the European morning. Late last month, it spiked to almost
CAD1.2880. The US dollar is getting stretched technically as it toys with
the upper Bollinger Band (~CAD1.2830). Still, there is no compelling sign
that it is exhausted. However, look for a top in the next day or two,
ahead of the Canadian jobs data at the end of the week. The
Mexican peso remains out of favor. The dollar settled February a
little below MXN20.50. It peaked above MXN21.46 today before
steadying. The greenback is well above its upper Bollinger Band
(~MXN21.17) for the third consecutive session. A firm inflation report
tomorrow may boost talk of a 75 bp hike instead of 50 bp when Banxico meets on
March 24.
Disclaimer
Reviewed by Marc Chandler
on
March 08, 2022
Rating:
