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Risk Assets Given a Reprieve

Overview: US equities failed to sustain early gains yesterday, but risk appetites have returned today.  Asia Pacific equities had a poor start, with Chinese and Japanese indices losing ground, but the equity benchmarks in Taiwan, Australia, India, and most of the smaller markets traded higher.  Taiwan’s 1.1% gain is notable as foreign investors continued to be heavy sellers.  Europe’s Stoxx 600 is snapping a four-day drop with an impressive 3.3% gain, led by the financials, consumer discretionary, and information technology.  US futures are trading 1.5-2.0% better.  We note that crypto has rallied strongly as well.  Benchmark yields are rising.  The US 10-year yield is up five basis points to 1.90%.  European yields are 2-6 bp higher.  China and Australia’s 10-year yields reached new highs for the year.  The dollar is broadly softer.  Of the majors, only the Japanese yen is weaker.  The beaten-up Swedish krona is setting the pace with more than a 1% rise.  The euro is testing $1.10, a three-day high.  Central European currencies are leading the emerging market currencies.  Gold peaked yesterday near $2070.50 and is coming off.  It is near $2011 near midday in Europe.  April WTI is below $122 after reaching $130.50 yesterday.  US natural gas is a little softer (10%) in the past two sessions, while the European natgas benchmark is off 15.5% and is lower on the week.  Nickel was limitedly up in Shanghai and is not expected to rest this week in London.  Iron ore prices eased, while copper is lower for the third consecutive session.  May wheat is off around 5.5%.

Asia Pacific

China’s February CPI was steady at 0.9%.  The decline in food prices (3.9%) offset the increase in non-food prices (2.1%).  Pork prices are still a drag (-42.5%).  Core prices eased to 1.1%, which is the lowest since last June, from 1.2%.  Producer prices rose 8.8% from a year ago from 9.1%.  It matches the slowest pace since April 2021.  On the month, it rose 0.5%, the first increase since last November.

Three other developments in China to note.  First, some reports suggest there is movement to allow a new Chinese IPO in the US later this year.  Second, there is talk that Chinese companies could take an equity stake in some large Russian companies to secure food, energy, and material supplies.  The sharp depreciation of the rouble makes its fire sale for Chinese companies.   Third, the latest American Chamber of Commerce survey showed little change from the past few years that almost 85% of US companies do not plan to move operations out of China, even if some tech companies look to diversify and build duplicate facilities.

Governor Lowe of the Reserve Bank of Australia acknowledged that a hike later this year is plausible, this seemed to reflect a subtle shift in his position.  The market, which had already been pricing in a more aggressive path than the RBA had signaled took the bait.  The market took the implied yield of Australia’s cash rate futures 3-5 bp higher.  The market leans toward a hike in June (~75% chance) and has slightly more than 30 bp of tightening priced in by July.

The dollar is firm against the yen near JPY115.90.  It is the strongest level since February 11, when the US first warned that Russia was ready to attack Ukraine.  It has not settled above JPY105.80 since February 10.  We suspect it can retest the multiyear high seen twice this year near JPY116.35 in the coming days.  The Australian dollar is finding its bearings after shedding two cents from Monday’s high around $0.7440.   It is testing the 200-day moving average (~$0.7320).  The $0.7345-$0.7365 band may hold back stronger gains today.  The greenback reached a nine-day high against the Chinese yuan by CNY6.3270 but has been sold back down to CNY6.3140. The PBOC set the dollar’s reference rate at CNY6.3178.  The market (Bloomberg survey median) was for CNY6.3166.  According to reports, the PBOC has transferred CNY1 trillion (~$160 bln) to the government.  The Chinese central bank, like other major central banks, give the government some of its profits every year.  Apparently, it is the first time the amount has been disclosed.  Lastly, early exit polls in South Korea are mixed in a close race between Lee and Yoon.


Russia has intensified the bombing of Kyiv.  Rouble trading re-opened in Russia for the first time this week, while the equity market remains closed.  Moscow will restrict trade in unspecified goods and raw materials.  The market appears to be pricing in an imminent default.   Meanwhile, a growing number of US consumer companies, from McDonalds to Coca-Cola and Pepsi, Starbucks, and PayPal are joining the boycott of Russia.

Poland offered to send more than two dozen Russian-made fighter planes to a US airbase in Germany to transfer to Ukraine appears to have been shot down by the US.  War planes departing from a NATO base and flying into Ukraine airspace contested by Russia could spur a clash between NATO and Russia and is being avoided.  The talk of Poland’s offer had circulated earlier this week, but the US seemed taken aback by the formal offer.

While the EU has waived all visa requirements for Ukrainian refugees and granted them automatic three-year stays, the UK has not followed suit.  It is requiring paperwork and computer uploads of documents.  This has triggered widespread criticism of Home Secretary Patel, and some of the fiercest comments have come from within the Tory Party.  Around 760 Ukrainian refugees have been granted visas by the UK.

Italy was the exception. Its January industrial production figures were much worse than expected.  The 3.4% decline compared with the median forecast of a 0.5% decline.  Recall that German industrial output rose 2% vs. expectations for a 0.5% gain, and the December decline was revised to a 1.1% gain.  French output was expected to also have risen by 0.5%, but it rose by 1.6%.  Spain’s industrial production fell by 0.1%.  The market had forecast a 1.0% gain, but December’s 2.6% contraction was revised to a fall of 0.5%.  The year-over-year pace rose from 3% to 4%.

The euro bottomed near $1.08 on Monday and is testing $1.10 in the European morning.  The $1.10 area corresponds to a (38.2%) retracement of the losses suffered since the Russian invasion began.  The next retracement (50%) is close to $1.1060.  What appears to be a short-covering squeeze is stretching the intraday momentum indicators.  North American dealers may be inclined to sell into the two-cent bounce. Sterling tested yesterday’s low below $1.3090 initially before recovering.  It has reached $1.3180 in the European morning.  Monday’s was closer to $1.3260.  The intraday momentum indicators are also stretched and $1.3200 may offer a nearby cap.


An argument can be made that rather than weaken, the global system is stronger today than two weeks ago. The system is stronger because the nearly the entire world has come out against the culprits.  The transgressor is being increasingly isolated.  Finance, trade, and access to consumer goods are all being withheld, while not 100%.  Surely it is a more significant blow than anyone reasonably could have expected after the milquetoast response to the 2008 war with Georgia, the 2014 annexation of Crimea, and numerous other affronts, include cyber-attacks and the assassination of Russian citizens.  What strengthens the system is when the norms are enforced.  What weakens the system is when the norms are violated with impunity as when the US invaded Iraq, for example.

Outside of the January JOLTS report, the economic focus in the US is on the budget bill to avoid a government shutdown and the Biden administration’s crypto strategy.  Canada’s economic calendar is light.  Mexico reports February CPI figures.  The headline rate is expected to reach near 7.25% from a little more than 7.05% in January.  It would be the fourth consecutive monthly reading above 7%.  The core rate is expected to approach 6.6% from about 6.2% in January.  It averaged about 5.6% in Q4 21.  A 75 bp rate hike later this month seems increasingly likely.  Brazil reports January industrial production figures.  It is expected to have unwound almost two percentage points of the nearly 3% increase seen at the end of last year.  Brazil’s central bank meets next week and is expected to deliver a 100 bp hike after three 150 bp hikes (October, December, and January).  The swaps market has about 275 bp of tightening discounted over the next 12 months.

The US dollar rallied from a little below CAD1.26 last Thursday to a new high for the year yesterday near CAD1.29.  Risk-off and the widening US two-year premium over Canada (At the end of January, the yields were almost identical, now the US is at a 20 bp premium.  At the end of last year, it was Canada that offered the 20 bp premium).  In any event, the risk-on mood today has seen the greenback return to the CAD1.28 area. It had been resistant, and now at first blush support.  The CAD1.2780 area is the (38.2%) retracement objective of the greenback’s leg up.  The Mexican peso had been thumped hard since the war broke out but is stabilizing today.  The US dollar rallied a little more than 6% against the peso since Russian troops invaded Ukraine.  It poked above MXN21.4670 yesterday and is offered around MXN21.2350 in near midday in Europe.  Initial support is seen around MXN21.15, but the MXN20.95-MXN21.00 may offer stronger support.  The Brazilian real has fared considerably better.  The US dollar initially bounced from BRL5.0 to above BRL5.20 but is holding mostly below BRL5.10 in recent sessions.

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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