The economic disruption seen since the US warning of an imminent Russian attack on Feb. 11 continued to ripple through the capital and commodity markets. Equities were being slammed. Most Asia Pacific bourses were off 2-3% today. Europe's Stoxx 600 gapped lower and approached February 2021 levels. US futures were around 1.5% lower.
The reaction in the major bond markets was subdued. The US 10-year yield was near 1.72%, off about 10 bp from a week ago. European benchmark yields were mostly firmer after falling 15-20 bp last week. In the foreign exchange market, the dollar-bloc currencies continued to show resilience, while the European complex remained under pressure.
The Swedish krona continued to underperform. It was off more than 5% in the past week. The euro slumped to almost $1.0810 in the European morning. The JP Morgan Emerging Market Currency Index was down 1.3% after last week's 4.6% drop. Central European currencies, as one might have expected, continued to be punished the most. They appeared to have been treated like high-beta euros.
Gold flirted with $2000. April WTI gapped higher and spiked to $130.33 before pulling back to around $123. US natgas was up more than 1%. It has risen by more than a quarter of the past three weeks. Europe's natgas benchmark was surging by nearly a third today after jumping by almost 123% last week.
Iron ore rose about 5.5% today after 14.7% last week. Copper initially rose by more than 1.5%, but was pulling back a bit. Still, it was up around 0.5% after gaining more than 10% last week. May wheat was rising for the sixth consecutive session. Today's 7% advance came on top of last week's 40.6% jump.
Asia Pacific
China and Russia's relationship was on two-tracks. The strategic relationship was based on the antipathy to a US-centric world and the expansion of NATO, which Beijing said the US was trying to create a Pacific version. The other track was tactical. They avoid saying much about each other's neighborhoods, including Ukraine, Taiwan, or the fact that Russia sells weapons to India that have been used to fight and resist China.
China reported a larger than expected Jan Feb trade surplus of nearly $116 bln. The median forecast in Bloomberg's survey was for a $95 bln surplus. Exports rose 16.3%, more than anticipated, while imports rose 15.5%, a bit less than expected. Separately, and also surprisingly, the value of China's reserves fell to $3.21 trillion from $3.22 trillion. A small gain had been expected. Still, it appeared that valuation, weaker non-dollar reserve currencies and a sell-off in bonds, were the key considerations.
China's National People's Congress gave a 5.5% growth target this year. It was on the upper end of expectations and higher than a weighted average of the projections of the provinces, which typically over-deliver. Still, it was the lowest since 1990, excluding 2020.
China's economy was said to have grown 8.1% last year. Despite increased spending and slower growth, the NPC projected that the budget deficit would fall to 2.8% of GDP from 3.2% last year. Here, Beijing seemed to plan to draw from unspent funds from past year. The targets seemed ambitious and would seem to require more monetary and fiscal support.
South Korea votes on Wednesday for a new president, who will serve one five-year term. The contest will go down to the wire. Lee represents the governing Democrats, who enjoy a super-majority in parliament. Of note, he has endorsed a universal basic income.
Yoon is the candidate of the major opposition People Power Party. He enjoyed a slight lead in the last poll, and he may have enjoyed a slight bump when a minor conservative candidate dropped out and endorsed him. Both campaigns have been marred with gaffes and petty scandals.
Unlike Japan and China, South Korea has been experiencing rising price pressures (3.7% February CPI and 3.2% core). The seven-day repo rate has been hiked three times beginning last August to 1.25%. The won was off about 3.1% this year.
The Japanese yen was sidelined. The dollar was trading in a narrow range between about JPY114.80 and JPY115.15. Last week's range was roughly JPY114.65-JPY115.80. Nevertheless, benchmark three-month implied volatility has risen above 8% to approach last November's spike to 8.2%, the highest since September 2020. The put-call skew (risk-reversal) has been the most extreme since October 2020. Demand for dollar puts, perhaps as protection for dollar receivables, appeared to be a key factor.
The Australian dollar's rally continued, as its commodity exposures attracted participants. It reached $0.7440 today, its best level since last November. It rose 2% last week, its fifth consecutive weekly advance. It was getting stretched. The upper Bollinger® Band (two standard deviations above the 20-day moving average) was around $0.7330, and the Aussie closed above it the past two sessions.
The greenback gapped higher against the Chinese yuan. It opened on the session high near CNY6.3265 but ground lower to CNY6.3170. The PBOC set the dollar's reference rate at CNY6.3478. The market (Bloomberg survey) looked for CNY6.3450.
Europe
The economic noose on Russia continued to tighten. Mastercard (NYSE:MA) and Visa (NYSE:V) will no longer support Russian activity (as of Mar. 10). Euroclear and Clearstream will no longer settle Russian ruble transactions. Russia's ability to service its debt was at risk. While some bonds allowed for ruble settlement and coupon payments, some did not.
Some dollar bond coupons are due next week, which reportedly do not have the ruble payment clause, and this could be the default event that triggers credit-default swaps. Of course, there was talk that China will help, but its assistance was likely limited. Its CIPS payment system works for yuan settlement only. Meanwhile, Russia has begun rationing staples ostensibly to prevent hoarding.
The euro plummeted through the CHF1.0 level for the first time today since early 2015 when the Swiss National Bank lifted its cap (floor) on the franc (euro). Under the threat of intervention by the SNB, the euro rebounded to CHF1.0050 in early European turnover but began coming off again. The weekly sight deposit report suggested no intervention took place last week.
Overall sight deposits were little changed, while the domestic sight deposits fell by about CHF3 bln. While the SNB may not have intervened, central banks in central Europe were thought to have intervened. The proximity to Russia and the weakness of the euro were the proximate triggers.
The euro was unable to sustain even modest upticks. It was off for the sixth consecutive session. Last week, it tumbled 3%. It was the fourth consecutive weekly drop. The euro has risen in only two weeks this year. A break of $1.08 could spur a move to the March 2020 low near $1.06, but there was increasingly talk of a move to parity.
Sterling was trading near $1.3150, its lowest level since December 2020. The $1.3165 area corresponded to the (38.2%) retracement of the big rally since March 2020 low close to $1.14. A convincing break of this area suggested a move into $1.2830-$1.3000 band.
America
While the US began moves to ban Russian oil imports (500k-600k barrels a day), Europe did not appear ready to do the same. April WTI futures gapped higher and pushed a little through $130 a barrel before pulling back. It was hovering around $123. The pre-weekend high was near $116.00.
There have been several developments over the weekend to note. Iran will provide more data on its nuclear efforts, and this could lead to renewing the accord the US pulled out of and allow for Iranian oil in Q3.
US officials reportedly met with senior members of Venezuela's Maduro government, apparently to discuss lifting sanctions. The US cut diplomatic ties in 2019. Before the sanctions and mismanagement, Venezuela was producing around 3 million barrels a day. Meanwhile, some Canadian capacity was being taken offline for maintenance, and Libya lost 200k barrels a day over the past few days due to the political crisis. Lastly, Saudi Arabia announced it will hike prices to Asia next month.
The economic highlight for the week in the US is the February CPI figures on Thursday. The headline pace could approach 8% and the core near 6.5%. Ahead of that report, on tap today is the January consumer credit. Note that American household debt increased by $1.02 trillion last year, the most since 2007. Total consumer debt is around $15.6 trillion, including cars and houses. Tomorrow, the US sees the January trade balance, where a large deficit is expected, and wholesale inventories, which may be linked to stronger imports.
In some quarters, there is still talk about "artificially" low rates in the US. However, consider what would happen if next week, the Fed Chair Powell were to channel Volcker and hike the Fed funds target by 100 bp. We suspect that medium and long-term US interest rates would fall sharply. Many would likely assume that it would drive the world's largest economy into contraction. Note that 2-10-year yield curve was slipping below 25 bp today.
Canada reports its January trade figures tomorrow and a return to surplus is expected. The highlight of the week will be the jobs report on Friday. After losing 200k jobs in January, the Canadian jobs market was expected to have recovered smartly. The unemployment rate was expected to fall to 6.3% from 6.5% even while the participation rate was projected to rise to 65.2% from 65.0%.
Mexico reports February CPI figures on Wednesday. A rise to nearly 7.25% is expected after 7.07% in January. At the end of the week, January industrial production figures are due. A small decline was expected.
Since late January, the US dollar has mostly been in a CAD1.2650-CAD1.2800 range. It was briefly pushed below CAD1.26 in the middle of last week but quickly snapped back to the upper end of the range. It was trading inside the pre-weekend range (~CAD1.2670-CAD1.2790). The Canadian dollar appeared pulled between its commodity exposure and its risk-off sensitivity.
The Mexican peso was less ambivalent. The greenback jumped 1.5% before the weekend and was up another 1.2% today. Near MXN21.20, the US dollar was at its best level since mid-December, when it poked above MXN21.36. The dollar rally has lifted it more than three standard deviations (~MXN21.21) from its 20-day moving average.
