Risk Appetites Remain Fragile

Overview: The sentiment that fueled the recovery in US equities before the weekend carried over into today.  Several Asia Pacific centers, including China, Taiwan, and South Korea were closed today, but Japan, Hong Kong, and India rose by more than 1%.  Europe's Stoxx 600 had a four-week drop in tow, is up around 0.6%, led by information technology and industrials.  The S&P and Dow futures are lower but the NASDAQ is up around 0.4%.  The US 10-year yield is around 1.79%, while European yields are mostly 2-4 bp higher except in Italy, where the presidential contest resulted in the status quo.  Italy's 10-year yield is slightly lower and its premium over Germany is around 127 bp, the least since November.   The dollar has come back softer.  The Antipodeans and Sweden lead the charge today, while the yen and Swiss franc are softer.  Emerging market currencies, are led by the freely accessible Turkish lira and South African rand. The JP Morgan Emerging Market Currency Index snapped a three-week advance last week and lost almost 1%.  It is about 0.2% higher around midday in Europe.  Gold lost about 3% in the last three sessions and is trading quietly today within the pre-weekend range.  March WTI is firm in the $87-$88 area.  US natgas prices have jumped 6%, while Europe's benchmark is off around 6%. Copper is about 0.8% higher after falling more than 4.5% over the past two sessions.  Note that lumber prices fell by 23% in the seven days through last Thursday and rallied 3% ahead of the weekend to snap a losing streak.  

Asia Pacific

The Chinese economy grew more than expected in Q4.  The 1.6% quarterly pace compares with a 1.2% median forecast in the Bloomberg survey and 0.2% in Q3.  Still, leaving aside the accuracy of its estimate provided two weeks after the end of the quarter, the quality of the growth is suspect.  The doubts were borne out by the January PMI figures released over the weekend.  The manufacturing PMI slipped to 50.1 from 50.3.  The new order component fell to 49.3 from 49.7 and has been below the 50 boom/bust level since last August.  Export orders are also contracting. The Caixin manufacturing PMI fell to 49.1 (from 50.9), its lowest level since February 2020.  Non-manufacturing help is a little better at 51.1 (from 52.7) but the services themselves fell to a five-month low.  Transportation and hospitality sectors were hit hard, suggesting the impact of the virus.  The composite fell to 51.0 from 52.2.  The other parts of the Caixin PMI survey will be released on February 6.  Covid and seasonal factors may have contributed to the weakness, but the takeaway underscores that Chinese officials have shifted from de-leveraging to supporting growth.  Fiscal and monetary policy levers are being pushed. Soft power levers are also coming into play.  

Support for Japan's new government waned in the most recent Nikkei survey to 59% from 65%.  There is a lingering concern that Japan is going to experience another phase of relatively short-term governments.  The first electoral test is a few months away.  In July, about half of the upper house of the Diet will be elected (124 or 245 seats).  Meanwhile, Japan's 10-year yield edged up to 0.185%, its highest level since January 2016.  International pressure seems to be the major driver here and the BOJ yield-curve-control limits it to around 25 bp.   The IMF has recommended that Japan target a short-term rate instead of the 10-year to be more effective.  

The dollar is consolidating in a narrow range against the Japanese yen inside last Friday's range (~JPY115.10-JPY115.70).  Today is the first session in five that the dollar has not (yet) risen above the previous session's high.  A move above JPY115.70 would signal a test on JPY116.00 and the multi-year high set on January 4 near JPY116.35.  The Australian dollar settled poorly last week.  All told it fell by 2.75% last week, its largest weekly decline in five months.  Technically, it was oversold, and speculators in the futures market had a near-record net short position.  These seemed vulnerable to a less dovish central bank (meeting first thing tomorrow in Sydney) and a better appetite for risk more generally.  Near-term potential may extend into the $0.7100 -$0.7120 area.  With the mainland markets closed, the offshore yuan continued the downside correction that began last week.  The US dollar rose to CNH6.3865, its highest-level since January 10.  It had re-entered the CNH6.35-CNH6.40 area that has mostly marked the range since the middle of last October.  


The UN Security Council will discuss Ukraine, but given the unanimity that is required, no action will be forthcoming.  The Security Council has a presidency that rotates on a monthly basis.  Russia will hold the presidency as of February 1.  Reports suggest the UK is considering doubling the number of troops it offers to NATO.  This sounds big and bold, but estimates suggest that this translates to less than 1000 troops.  Last week, the US said that 8500 troops were on heightened alert for possible deployment to assist NATO. Meanwhile, the Pentagon reports Russia is still boosting its troop mobilization.  Separately, and noteworthy, the President of Ukraine, no Russian-sympathizer, cautioned that the US was spurring panic that was not helpful.  On another front, Russia acquiesced to Ireland's formal request and shifted its military exercises (February 3-February 8) away from Ireland's exclusive economic zone.  It may have planned its exercises there with the intent of relenting when asked to stir further divisions.  

After several rounds without a winner, a compromise was struck in Italy.  The current president, Matterella will serve another term.  All the parties but the Brothers of Italy endorsed this outcome.  Although the term is for seven years, don't expect Matterella to complete his term.  The most likely scenario is that he serves until next year's parliamentary election.  Draghi's role as caretaker Prime Minister will have come to a natural end and Matterella can resign.  Draghi would once again be the favored candidate to succeed him.  Mattarella’s predecessor, Napolitano, served about 20 months of his second term.  Napolitano accepted an unprecedent second term to also help the country through a fragmented parliament.   Some observers are claiming that Draghi has been weakened by losing his presidential bid.  We are less convinced but recognize that the agenda in Italy will not shift toward the enacting the reforms needed to secure the EU funding and implementation of the new electoral law that will govern next year's election.  

Spain and German states reported January CPI figures.  Spain's harmonized measure fell 0.9%, which was less than expected.  The year-over-year rate eased to 6.1% from 6.6%.  The median forecast (Bloomberg survey) was for 5.5%.  Most German states reported softer year-over-year pressures, but aggregate harmonized measure may come in a little above the unchanged reading expected.  The eurozone figure is due out on Wednesday and the latest (Bloomberg) survey results put it at 4.4% down from 5.0%.  Separately, the eurozone Q4 GDP grew by 0.3% quarter-over-quarter, to lift the year-over-year rate to 4.6%, in line with expectations.  

The euro snapped a four-day drop ahead of the weekend, but only after falling to new lows since June 2020 (~$1.1120).  It extended the recovery to about $1.1180.  A move above the $1.1200 area would boost ideas that the breakout was fake as was the upside break around the middle of the month.  There are two chunk options that expire tomorrow that are worth noting.  There is one for nearly 2 bln euro at $1.1225 and the other is for 1.3 bln year at $1.1150.  Sterling's pullback from $1.3750 seen near mid-month stalled at the end of last week near $1.3360.  It has recovered to almost $1.3450 today.  A move above $1.3460 could see $1.3500-$1.3550 ahead of what is expected to be a hawkish central bank message on Thursday.  


Comments by Atlanta Fed's Bostic that the Fed could raise rates by 50 bp in March seemed to reinforce the hawkish tilt by the market.  Recall that several banks revised their Fed call last week.  Many economists are looking for more than four hikes this year.  The range appears to be 3-7 and 2-4 next year.  We do not read into Bostic's comments to contain new information.  He essentially repeated Chair Powell's effort to secure the maximum of flexibility in these uncertain times.  Moreover, while Powell said at his press conference that if he could re-do his December dot he would recognize higher inflation, Bostic said he continues see three rate hikes as appropriate this year. 

Powell noted that Q1 growth is going to be weak.  He was referring to the virus interruption.  However, qualitatively Q4 GDP left something to be desired.  Inventory accumulation accounted for nearly five percentage points of the 6.9% expansion.  Note that the final sales to domestic purchasers (excludes trade and inventories), a measure of the underlying strength of the domestic economy, rose by 1.9% after 1.3% growth in Q3.  Before the weekend, the Atlanta Fed GDPNow first estimate for Q1 22 stood at 0.1%.  It is the beginning of the quarter, and of course, it is subject to significant adjustments.  Still, expectations for the January jobs data at the end of the week have been scaled back.  The median in the Bloomberg survey is now at 150k, and at least a couple of banks, including some with very aggressive Fed forecast, have warned of the risk of an outright loss of jobs. 

The busy week begins quietly with the Chicago PMI and the Dallas manufacturing Index.  Neither are typically market-movers.   The Fed's Daly speaks today and on Thursday, the new Fed nominees with have their confirmation hearings.  Canada's employment data on Friday is the highlight, but tomorrow Canada reports November GDP (expected to rise by 0.3% after expanding by 0.8% in October). Mexico provides its preliminary Q4 GDP figures today.  It may have contracted for the second consecutive quarter.  Brazil's trade and industrial production will be reported ahead of the central bank meeting on Wednesday.  It has pre-committed to a 150 bp hike that would lift the Selic rate to 10.75%.  

The US dollar rose 1.5% against the Canadian dollar last week, the most since August.   We see the Bank of Canada to be as hawkish as the Federal Reserve, but the falling two-year premium Canada offers and the risk-off mood took its toll.  The greenback's bounce stalled near CAD1.2800.  Initial support is seen now around CAD1.2680-CAD1.2700.  Look for CAD1.2750-CAD1.2770 to cap it in North America today.  The greenback rose every day last week against the Mexican peso.  It peaked around MXN20.9140 before the weekend, its highest level this month.  During the dollar's decline since the middle of the month, the five-day moving average has offered support, especially on a closing basis.  The five-day average is now near MXN20.74.  A close below it may suggest a near-term dollar top may be in place.  



Risk Appetites Remain Fragile Risk Appetites Remain Fragile Reviewed by Marc Chandler on January 31, 2022 Rating: 5
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