While the World Health Organization debated about downgrading COVID from a pandemic, the rise in China and Hong Kong cases has been striking. A lockdown in Shenzhen and restrictions in Shanghai, coupled with a record fine by PBOC officials on Tencent (HK:0700) drove local stocks sharply lower.
China's CSI 300 fell 3% and a measure of Chinese stocks that trade in HK plunged more than 7%. The Hang Seng itself dropped 5%. COVID in China and Hong Kong added to the risk of more supply chain disruptions. Europe's Stoxx 600 was up about 1.6%, led by financials and industrials. US futures were 0.5%-0.7% better.
Bond markets were sliding. Yields were 8-10 bp higher in European trade. The US 10-year Treasury yield was near 2.10%. It rose slightly more than 25 bp last week and was up 10 basis points today. The US 5-year yield was pushing above 2% today for the first time since May 2019. It was the sixth consecutive advance.
The dollar was sitting at the fulcrum today. The Scandis and euro were advancing, while the dollar-bloc and Japanese yen were softer. The greenback pushed above JPY117 at the end of last week and approached JPY118 today. Among the emerging market complex, the beleaguered central European currencies were snapping back today.
The Hungarian forint, Czech koruna, and Polish zloty were up more than 1% today. The JP Morgan Emerging Market Index had a three-week, roughly 6.5% slide in tow. It was up about 1.1% today.
Gold was heavy near $1960 after peaking last week around $2070. Support was seen in the $1950-$1958 band. April WTI was also slipping lower after meeting resistance near $110. Last week's low was slightly above $103. US natgas prices were around 2.3% lower after falling 5.8% last week. Europe's benchmark was off 15% after plummeting more than 34% last week. Iron ore was off 7%, falling for its fifth consecutive session. Copper was trading lower as well. It has fallen in five of the past six sessions. May wheat was softer. It fell 8.5% last week.
Asia Pacific
US National Security Adviser Sullivan was to meet with his Chinese counterpart Yang today. The last meeting was in October. The ostensible purpose was to exchange views on global and regional issues. The media had played up the diplomatic language of the statement that followed last month's meeting between Putin and Xi claiming a "friendship with no limits."
The media wanted to take it at face value, yet it knew it to be misconstrued. Consider, for example, that media reports also revealed that Russia was selling weapons to India to help it fight China. "No limits?"
Sullivan was also clear that thus far there was no evidence that Beijing was trying to circumvent the sanctions. That said, last week the US warned Chinese chip makers against supplying Russia with products that were subject to export controls. Affirmation through negation. Other US officials said that Moscow had reached out to Beijing to secure military equipment, even though part of the logistical problem Russian forces have been experiencing appeared to be coming from shoddy parts (e.g., tires) made in China. Reports suggested that since doubling the yuan-ruble band to 10%, there wasn't an increase in turnover.
There seemed to be a debate over how much China knew of Putin's intentions. Some US officials seemed to think China may have been aware that Putin was planning something, but may not have known the full extent. Beijing cannot be happy with what was happening, even the European theater needed new resources that could have otherwise been used to check China in the Asia-Pacific region.
The challenge posed by higher commodities was not inflation so much in China, where the CPI was less than 1% and PPI fell for four consecutive months. The challenge was growth. The 5.5% target will be more difficult to meet. From Beijing's vantage point, the unprecedented swift and broad sanctions on Russia strengthened US-European ties. Xi had been reaching out to European leaders since Russia invaded Ukraine trying to strengthen ties.
At the same time, Japan, Singapore, Taiwan, and South Korea (which has a new president whose rhetoric is more confrontational to Beijing) appeared to have heightened sensitivity to China's actions in the region. China saw a web of US relationships that were tantamount to a Pacific NATO: 5-4-3-2...Five Eyes (Australia, New Zealand, Canada, UK, and the US), the Quad (Australia, India, Japan, US), AUKUS (Australia, UK, US), several bilateral security pacts including Japan, South Korea, Philippines.
The headwinds to China's growth (domestic challenges included the property market and the crack down on technology, and the social restrictions associated with COVID) have mounted. The front page of China's Securities Journal suggested the PBOC could cut rates to support the economy. There was heightened speculation that a cut could come as early as tomorrow when the 1-year Medium-Term Lending Facility is set.
Many now look for a 10 bp cut to 2.75%. Recall it was cut 10 bp in January, which was the first cut since the two reductions in the first four months of 2020 (cumulative 30 bp). China's 10-year yield fell for the third day today and near 2.76%, was the lowest in a month. The Chinese premium over the US narrowed to about 72 bp from over 105 bp at the start of last week.
The dollar reached almost JPY117.90 earlier today as it extended last week's breakout. The JPY118 area offered the nearby cap, but the charts suggested scope may exist toward JPY118.60. Initial support was seen in the JPY117.40-JPY117.50 band. The key seemed to be rising US yields more than the firmer tone in equities.
The Australian dollar reversed lower last Monday and with today's low near $0.7235 nearly completed a (61.8%) retracement of the gains scored since the Russian invasion (~$0.7225). The selling pressure may have burnt itself out, the Aussie needed to push above $0.7280-$0.7300 to lift the technical tone.
In a rare occurrence, the US dollar gapped higher against the Chinese yuan. The gap appeared on the weekly charts, which gave it added importance. The dollar's pre-weekend high was just shy of CNY6.34 and today's low was slightly above CNY6.3450. It reached nearly CNY6.3625 before steadying. The PBOC set the dollar's reference rate at CNY6.3506, well above the CNY6.3356 median projection in Bloomberg's survey. Last month's high was a little north of CNY6.37 and the year's high was set in early January slightly below CNY6.3850.
Europe
There were some outstanding issues between the US and Iran in resurrecting the 2015 accord, but the talks were suspended. Russia, which was playing an important role here (perhaps, as one observer suggested, receiving shipment of enriched uranium from Iran), wanted guarantees that US sanctions would not affect Iran's planned economic and commercial ties. The US refused. Iran's uranium enrichment has gone forward. Iran wanted a guarantee too that the US does not leave the pact again. Europe had been nursing the talks which the US did not participate in directly. The failure to return to the 2015 pact would force another issue to the fore: Iran's advancing nuclear program.
Some suggested that Russia would not have attacked Ukraine if Kyiv had retained the nuclear weapons from the Soviet era. Maybe. It was worth thinking about, but nuclear powers have clashed without the resort to weapons of mass destruction (e.g., India-Pakistan, India-China). Russia has not directly attacked a NATO member. Russia claimed that convoys carrying western military supplies were legitimate targets. This was one scenario for the broadening of the war. Russia's bombardment of western Ukraine was approaching the Polish border.
Russia was threatening to arrest corporate leaders and seize assets of businesses that were critical of the war or suspending activity. Meanwhile, there was much discussion about the nearly $120 mln in coupon payments due Wednesday. While the indicative pricing in the credit default swaps market was consistent with an imminent default, there was a grace period that should not be forgotten. This meant that a formal default was not likely this week.
The euro initially extended its pre-weekend losses and slipped briefly below $1.09, where a 1.8 bln euro option expires today. It recovered to almost $1.0970. The intraday momentum indicators were stretched, and nearby resistance was seen in the $1.0980-$1.1000 band. The pre-weekend high was close to $1.1045.
Sterling's recent losses were extended to almost $1.30 today, but it also stabilized and returned to the $1.3060 area. While a move above there would target $1.3100, it seemed too far away given the extended intraday momentum readings. Tomorrow the UK reports employment figures, but the highlight is the BOE meeting on Thursday that was widely expected to deliver another 25 bp hike.
America
The focus is of course on the FOMC meeting that concludes at midweek. However, ahead of it, there are several high-frequency economic reports. These include the March Empire State manufacturing survey and February PPI tomorrow. Producer price inflation accelerated, with the headline expected to reach 10%. The Empire State manufacturing survey was forecast to have improved, but we were concerned that the magnitude of the slowdown in Q1 was still not fully appreciated. February retail sales will be released before the FOMC meeting concludes on Wednesday. A small gain was expected after a 3.8% surge was reported in January.
Canada reported monster jobs data ahead of the weekend. Employment jumped 336.6k, well above the 127.5k median forecast in Bloomberg's survey. Full-time positions alone surged 121.5k. The unemployment rate fell one percentage point to 5.5% and the participation rate jumped to 65.4% from 65.0%. Wages for permanent employees accelerated to 3.3% from 2.4%. The highlight this week is the February CPI report due in midweeks. The headline pace likely picked up to 5.5% from 5.1% and the underlying core measures also probably accelerated.
Brazil's February IPCA inflation accelerated to 10.54% from 10.38%. This was a little ahead of expectations. It likely solidified expectations for a 100 bp hike a few hours after the FOMC delivers its first hike in the middle of the week. Mexico had a light economic calendar this week, but Banxico was likely to hike 50-75 bp next week.
The Canadian dollar was trading quietly within the pre-weekend range (~CAD1.2695-CAD1.2795). The macro story seemed mostly constructive, but the US two-year premium over Canada was a negative development. The upticks in the US S&P 500, a proxy for risk, did not seem to be offering the Canadian dollar the support that it had in the recent past. Initial support was seen near CAD1.2720.
The greenback was testing support near MXN20.85. The MXN20.81 area corresponded to the (50%) retracement of the dollar's gains since the war began. Below there, support was seen in the MXN20.63-MXN20.65 band.
