US Sows Doubts Over Eastern Europe De-Escalation
Today’s Financial Markets Highlights
- • Uncertainty over Russia’s intentions and troop movements is sapping risk appetites. The situation may not be clearer until next week. Europe, Russia, and Iran also seem more optimistic than the US about a new nuclear deal.
- • Seasonal patterns work against Japan and Europe’s January trade figures but rising energy prices is generating a negative terms of trade shock.
- • Australia’s employment data was a bit better than expected, though hours worked fell sharply. Still, the report is unlikely to change minds either in the market, which sees a rate hike near midyear, and the central bank, which continues to push back.
- • Despite stronger than expected retail sales and industrial output figures yesterday, short-term US rates, including the implied yield of the December Fed funds futures, fell. There is some follow-through action today.
- • Today’s US housing starts, permits, Philly Fed survey, and weekly initial jobless claim probably take a backseat to geopolitical issues.
- • Canada’s stronger than expected CPI reinforces expectations that the first hike will be delivered in early March. The confrontation between the Canadian government and protesters continues in Ottawa.
US intelligence claims that Russia is still mobilizing for an attack on Ukraine is sapping risk appetites and lifting gold to its highest level since last June around $1885-$1890. Asia Pacific equities advanced, except in Japan. Europe’s Stoxx 600 is nursing a small loss, while US futures are off around 0.4%-0.6%. The 10-year US Treasury yield is hovering slightly above 2.0%. European benchmark yields are 2-4 bp lower. The Scandis and euro are bearing the brunt of the risk-off move among the major currencies, while the Antipodeans, yen, Swiss franc, and sterling have pushed higher. Emerging market currencies are mostly lower, led by Russia and central European currencies, but the JP Morgan Emerging Market Currency is edging higher for the fourth consecutive session, recovering from earlier weakness. Hungary left its one-week repo rate steady at 4.3% and Turkey is expected to also stand pat (14%). April WTI is retracing most of yesterday’s 1.8% gain and is straddling $90 a barrel. US natural gas is falling for the first time this week. Europe’s benchmark is up about 10% since Tuesday’s 16% slide. Iron ore slumped 7% after it rose 3.2% yesterday. Copper is slipping for the first session in four.
Japan reported weaker than expected exports and stronger than expected imports drove the trade deficit to JPY2.19 trillion. It was a third larger than expected. Seasonally, Japan’s January trade balance always (20-years-plus) deteriorated from December. Yet, there is something more going on. Rising energy and commodity prices more generally are deteriorating Japan’s terms of trade. It shares that with the eurozone that reported its largest trade deficit in 13 years earlier this week. EMU’s trade balance also typically deteriorates in January from December, but surge in energy prices appears to have aggravated the seasonal pattern. Meanwhile, nearly every day that passes now means that a significant disruption of Russia’s gas supplies could have a diminishing impact on Europe as spring approaches.
Australia’s jobs market held up better than expected last month. It created almost 18k jobs. The market expected a flat report. The positions created were all part-time posts, while full-time positions fell by 17k after increasing 41k in December. Australia grew an average of almost 3 full-time jobs last year after losing a little more than 8k a month in 2020. While the unemployment rate was steady at 4.2%, the participation rate ticked up to 66.2% from 66.1%. The virus (sick-leave) and extended time-off (vacations) saw the hours worked fall 8.8% month-over-month. Australia’s employment report is unlikely to impact expectations. The market continues to price in the first hike around mid-year. Rather than ratify market expectations, the central bank continues to pushback.
The US dollar slipped through JPY115.00 for the first time since February 7. The low was recorded in early European turnover. The intraday momentum indicators are stretched, but a break of the JPY114.90 could see JPY114.60. There is an option for nearly $1.1 bln struck there that expires today. The JPY115.20 area may offer the immediate cap. The Australian dollar was initially sold from around $0.7210 down to $0.7150 before finding good bids. It recovered back to session highs before stalling. It is straddling the $0.7200 area in late morning turnover in Europe, leaving it little changed on the day. The greenback briefly and shallowly slipped through CNY6.33 and rebounded to almost CNY6.34. For the third session in a row, the PBOC set the dollar’s reference rate a little softer than expected (CNY6.3321 vs. CNY6.3325, median projection in Bloomberg’s forecast).
The US claims that rather than withdraw troops as previously reported, Russia has mobilized another 7k troops. Moscow denies it. Russia is involved in military exercises. The operations in the Crimea appeared to have ended, but the ones with Belarus are expected to last through the weekend. It seems like Russian troop movement next week may be more telling. The G7 foreign ministers are meeting on Saturday.
NATO chief Stoltenberg’s term ends in October. He will serve out his term before heading home to lead the central bank. Norges Bank Olsen’s term ends next month. Deputy Governor Ida Bache who vied for the top job will act as interim head until Stoltenberg is ready. The Norges Bank Governor also leads the $1.3 trillion sovereign wealth fund. Last month, the central bank signaled its intention to hike rates in March. The swaps market has 100 bp of tightening priced in over the next 12 months.
The euro was sold slightly through $1.1325 in Asia after holding below $1.14 yesterday. The $1.1380-$1.1400 area looks to still cap upticks. The 1.7 bln euro in options struck in the $1.1435-$1.1450 area look set to roll-off today. If uncertainty over Russia’s intentions is a negative for the euro, the narrowing of the US two-year premium over Germany for the third consecutive session is a supportive development. Sterling is bid. It is trading above $1.36, which it has not settled above in nearly a month. The intrasession high this month was set near $1.3645. The UK reports January retail sales tomorrow and a bounce is expected after January’s large fall. The euro has fallen to back to around GBP0.8350 near where it bottomed on Monday.
How prices respond to fundamental news is often revealing. Yesterday, the US reports stronger than expected January retail sales and industrial output figures. But the two-year yield fell five basis points and the implied yield of December Fed funds futures contract shed 4.5 bp. The two-year yield is another 3.5 bp lower today and is about 1.5 bp lower on the week (slightly above 1.48%). With today’s five basis point slippage, the December Fed funds futures implies an average effective yield of 1.53% at the end of the year, which is about 6.5 bp lower than where it finished last week after the US warned of a possible Russian attack on Ukraine in days.
Europe, Russia, and Iran are seemingly more optimistic than the US a deal with Iran may be near. With OPEC+ struggling to fulfill their commitments to boost output by 400k barrels a day and low inventories among many of the large consuming countries, new supply from Iran would help ease address the global shortage that has lifted price to almost $100 a barrel. Saudi Arabia is believed to have about 2 mln barrels a day in spare capacity is reluctant to jeopardize the six-year agreement under the OPEC+ framework. The US EIA reported an unexpected build of US oil inventories yesterday, but Cushing saw an almost 2 milt barrel draw.
The US reports January housing starts and permits. Both are expected to have softened but remain at historically elevated levels. Although adverse weather may have impacted starts, the concern is rising rates and commodity prices (e.g., March lumber has risen by around 25% this month alone) will weaken demand. The US also sees the Philadelphia Fed’s manufacturing survey and weekly initial jobless claims.
Canada’s January CPI surprised on the upside yesterday. The 5.1% year-over-year headline pace was the highest since 1991, while the monthly increase of 0.9% was the largest since January 2017. Gasoline prices rose 3.2%, meat jumped a little more than 10%, and homeowner equivalent expenses jumped 13.5%. The Bank of Canada is set to hike rates on March 2. The market has about a 1-in-3 chance of a 50 bp move discounted.
For about a week, the US offered a premium over Canada for two-year money, but it slipped back into a discount yesterday and is a little larger today. Oil is firmer, but the general risk-off mood, given the uncertainties in Eastern Europe, weighs on the Loonie. Meanwhile, the Canadian police have sent written warnings to hundreds who decamped in Ottawa. It appears to be a prelude to arrests. The US dollar remains confined to a CAD1.2650-CAD1.2660 to CAD1.2800 trading range. It approached the lower end of the range yesterday and is checking out the air above CAD1.27 near midday in Europe. The greenback finally took out the 200-day moving average against the Mexican peso. It is trading at its lowest level since last October (~MXN20.25-MXN20.26). There is little chart support ahead of MXN20.12. Still, the intrasession momentum indicators are stretched, warning against chasing it in early North American activity. A bounce can carry the dollar back to the MXN20.30-MXN20.33 area.
Bannockburn Global Forex