Overview: Most Asia Pacific equity markets moved
lower after US losses yesterday and Tencent's earnings miss today.
Chinese and Hong Kong markets led the regional decline that spared only Japan
and Australia among the larger markets. A better than expected flash PMI
reading is helping the Stoxx 600 stabilize after yesterday's 1% drop. US futures
are recouping around half of yesterday's losses. Bond markets remain
under pressures. The 10-year Treasury yield is up around nine basis
points to 2.38%. European yields are 5-7 bp higher. The Scandis are
proving most resilient to the stronger US dollar today. The Norwegian
krone, helped by a 25 bp rate hike, is the strongest of the majors. As
expected, the Swiss National Bank remained on hold. The Swiss franc, Japanese yen and the Antipodeans are the weakest of the majors with around a 0.25%-0.45% loss in late
morning turnover in Europe. Among the emerging market currencies, which
are mostly lower against the dollar, the Mexican peso has edged higher.
Banxico is expected to hike rates by 50 bp later today. The Philippine
peso, where the central bank stood pat, has also firmed. Turning to
commodities, gold approached the upper end of its recent range near
$1950. A break of it could spur a move toward $1962. May WTI is steady.
The move above $113.35 targets the $118 area ahead of the $126 high set earlier
this month. US natgas is softer for the third sessions, while Europe's
benchmark extends the two-day, ~16% advance by another 8% today. Iron ore
firmed and copper is testing the (61.8%) retracement target the pullback since
March 7 near $480. May wheat is softer for the third session.
Asia Pacific
Japan's preliminary March
PMI suggests the world's third largest economy has begun stabilizing and a
Covid and natural disaster disrupted Q1 growth. The manufacturing PMI rose to 53.2 from
52.7. It finished last year at 54.3. The contraction in services
eased to 48.7 from 44.2. This is the best reading in the first three
months of the year. The composite reading recovered to 49.3 after falling
in February to 45.8 from January's 49.9.
Australia's flash March PMI
showed the economic momentum strengthened. The manufacturing PMI rose to 57.3
from 57.0 and the services PMI improved to 57.9 from 57.4. This saw the
composite PMI increase to 57.1 from 56.6. It is the strongest since last
May. The futures market has brought forward the anticipated first hike by
the Reserve Bank of Australia to June from July.
The dollar's run against the
yen continues. With
today's advance, it has risen 13 of the past 14 sessions. It began the
move after closing around JPY114.80 on March 4. It reached JPY121.75
today, where the upper Bollinger Band is found. With rising US yields and no official pushback, the upside still beckons. There is little chart resistance
until closer to JPY123.50. The Australian dollar is struggling
near $0.7500 and was unable to extend yesterday's gain. It too
flirted with the upper Bollinger Band. Yesterday's low around
$0.7450 may offer initial support. The greenback made a new
seven-day high against the Chinese yuan near CNY6.3775 before backing off.
After selling Chinese bonds last month, foreign investors appear to have
returned since the middle of the month. The PBOC set the dollar's
reference rate softer than expected today at CNY6.3640. The median
projection in Bloomberg's survey was for CNY6.3663. The offshore yuan
(CNH) strengthened for the first time in five sessions.
Europe
The takeaway from the flash
euro zone PMI is that the regional economy is proving more resilient than
expected to the war and related economic disruption. The aggregate manufacturing PMI slipped to
57.0 from 58.2 and better than the 56.0 median forecast. The German
reading was stronger than expected at 57.6 (from 58.4), but the French report
was slightly softer than expected at 54.8 (from 57.2). The aggregate
service PMI stands at 54.8 down from 55.5, and better than the 54.3 median
forecast in Bloomberg survey. The German report (53.7 vs. 55.8 in
February) and the French (57.4 vs 55.5) were better than expected. The
EMU composite reading stands at 54.5, above the forecasted 53.8, even if lower
than the 55.5 level seen in February.
The UK's flash PMI was
mixed. Manufacturing slowed (55.5 from 58.0, and 57.0 expected). Services improved
(61.0 from 60.5 and 58.0 expected). The composite held in much better than
anticipated, slipping to only 59.7 from 59.9. The median forecast in
Bloomberg's survey was for 57.5. Tomorrow, the UK is expected to report
that retail sales slowed last month to 0.5% as auto fuel is excluded after a
1.7% gain in January. The market is still digesting the implications of
yesterday's the Spring Budget statement. This year's GDP forecast was cut
to 3.8% from 6%. Next year growth is seen slowing to 1.8%. The fuel
duty has been cut until next March. The basic personal income tax rate will
be cut to 19% from 20% in 2024, which is understood to be just before the next
parliament election. The Office of Budget Responsibility says that
households still face a 2.2% loss of disposable income, and that Chancellor
Sunak has offset about 1/6 of the tax increases imposed under his two-year
tenure.
Russia's demand to be paid
in roubles for its gas exports to "unfriendly" nations is a
ruse. It is an
irritant but of little substantive meaning. Currently, the gas is primarily
paid for in euros (58%) and dollars (39%). If Putin's order sticks, the
euros and dollars would first be sold to a bank (e.g., in Bulgaria, or
Gazprom's bank that has not been excluded from SWIFT) for roubles first. Russia
needs hard currency not roubles. The contracts may require euro or dollar
payments, but arguably the sanctions have created conditions for force majeure
if the legalistic framework prevails. The move could help the rouble
strengthen, and that seemed to be the initial market reaction yesterday, but
the rouble trading is far from normal or transparent.
As widely expected, the
Swiss National Bank kept its policy rate unchanged at -0.75%. Norway's Norges Bank delivered its
third hike in the cycle that began last September. Its deposit rate now
sits at 0.75%. It was seen as a hawkish hike as the central bank lifted
its rate path and indicated plans to hike in June. It anticipates the
deposit rate to rise to 2.50% by the end of next year. Previously, it had
seen the policy rate at 1.75% at the end of 2023.
The euro has gone nowhere in
the past three days.
It continues to chop between $1.0960 and $1.1045. It settled near $1.1050
last week. The single currency has spent this week so far in its
narrowest range in five weeks. Last week's range was roughly
$1.09-$1.1135. Continued consolidation is the most likely near-term
scenario. Sterling is a different kettle of fish. It
reached almost $1.33 yesterday, its best level since March 4.
However, it seemed unimpressed with Sunak's budget and settled slightly
above $1.3200. It has pulled back further today, to almost $1.3155. Note
that a large option (~GBP990 mln) is struck at $1.3150, which expires
today. It also corresponds to a (50%) retracement of the rally since the
March 15 low near $1.30. A close above $1.3200 would help stabilize the
tone.
America
The US has a busy economic
calendar today. The
data includes the Q4 current account, weekly initial jobless claims, durable goods
orders, the flash PMI and the Kansas Fed's manufacturing survey. In
addition, at least four Fed officials speak (Kashkari, Waller, Evans, and
Bostic). They have all spoken recently and their views are known. A
consensus appears to be emerging in favor of a 50 bp move at the May 4 FOMC
meeting. The Fed funds futures pricing implies about a 75% chance of a 50
bp rather than a 25 bp move. In the next six meetings (the remainder of
the year), the Fed funds futures strip has almost 190 bp of tightening priced
in, which shows the leaning toward two 50 bp moves.
Mexico will report its
bi-weekly CPI figures and January retail sales today, but the focus is on the
central bank. It is
expected to hike its overnight rate by 50 bp to 6.5%. It would be the
third such move in a row, and the second under the new governor. The
swaps market has about 220 bp of tightening priced in for the next six
months. Chile and Colombian central banks meet next week and are
also expected to hike.
The US dollar fell to almost
CAD1.2540 yesterday, its lowest level in two months. There has been no follow-through selling
today. Nearby resistance is seen in the CAD1.2600-CAD1.2625 area, which
houses this week's high and the 200-day moving average. The swaps
market is pricing in about a 2/3 chance of a 50 bp move by the Bank of Canada
when it meets on April 13. It may also begin to allow its balance sheet to
shrink. Latam currencies are five of the top six emerging market
currencies this year. The South African rand is second, up about 8%
this year, to the Brazilian real's 15.5% gain. South Africa's central
bank is expected to lift its policy rate to 4.25% from 4.0% later today.
The Mexican peso is up nearly 1.6% this year. It is near its best level
since last October. There is little chart support for the greenback ahead of
MXN20.00, but the low from October was near MXN20.12. The dollar has
convincingly broken below BRL5.00 and the next important area is near BRL4.70.
Disclaimer
Reviewed by Marc Chandler
on
March 24, 2022
Rating:
